UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x
ANNUAL
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For
the fiscal year ended December 31, 2008
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Or
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o
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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Commission
File Number: 000-50531
ETRIALS
WORLDWIDE, INC.
(Exact
name of registrant as specified in its charter)
Delaware
(State
or other jurisdiction of incorporation or organization)
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20-0308891
(I.R.S.
Employer Identification No.)
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4000
Aerial Center Parkway
Morrisville,
North Carolina 27560
(Address
of principal executive offices) (Zip Code)
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(919) 653-3400
(Registrant’s
telephone number, including area code)
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Securities
registered under Section 12(b) of the Act:
Common
Stock, par value $.0001 per
share
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Securities
registered under Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
o
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act. Yes
o
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past
90 days. Yes
x
No
o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated
filer
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o
(Do
not check if a smaller reporting company)
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Smaller reporting company
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x
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Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act). Yes
o
No
x
The
aggregate market value of common stock held by non-affiliates of the registrant
as of June 30, 2008, the last business day of the registrant’s most recently
completed second fiscal quarter, was $12,290,536 (based on the closing sale
price of $1.85 per share).
The
number of shares of the registrant’s Common Stock, $0.0001 par value per share,
outstanding as of March 3, 2009 was 10,767,520.
DOCUMENTS
INCORPORATED BY REFERENCE:
Portions
of the definitive Proxy Statement to be delivered to shareholders in connection
with the Annual Meeting of Shareholders to be held on June 2, 2009 are
incorporated by reference into Part III.
ETRIALS
WORLDWIDE, INC.
ANNUAL
REPORT ON
FORM 10-K
FOR
THE YEAR ENDED DECEMBER 31, 2008
Table
of Contents
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Item 15.
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30
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31
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F-1
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This
Business section and other parts of this Report contain forward-looking
statements that involve risk and uncertainties. Our actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those set forth in "Item 1A. Risk Factors,” “Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations—Certain Factors That
May Affect Future Results," and elsewhere in this Report.
Overview
etrials
Worldwide, Inc. (“etrials” or the “Company” or “we” or “us” or “our” or similar
words) is a provider of eClinical software technology and services to
pharmaceutical, biotechnology, medical device, and contract research
organizations
, or
CROs
. We offer a broad range of clinical trial
technology and services including electr
onic data capture, handheld devices, and interactive
voice and Web response software, which is designed to speed and improve the
process of collecting data in clinical trials performed for drug and medical
device development.
Our primary
focus is on the c
ostly and time-consuming
clinical trial phase of drug development.
We provide pharmaceutical, biotechnology,
medical device companies and CROs with integrated software technology and
services designed to significantly reduce the time spent collecting
clin
ical trials data, and managing clinical
trials performance, using an automated and easy-to-use mechanism to collect data
directly from clinical investigators and patients. We believe that our automated
data collection software enables our customers to red
u
ce overall
clinical trial research costs, enhance data quality and reduce the time it takes
to close a study database.
History
and Merger
Our
subsidiary, etrials, Inc., which operates our business, was incorporated in 1999
in the State of Delaware under the name Pharmacentric Technologies, Inc., for
the purpose of managing certain assets acquired from Persimmon IT,
Inc. In March 2000, Pharmacentric acquired Expidata, and in January
2003, Araccel Corporation merged into etrials, Inc. Araccel primarily provided
eClinical electronic patient reported outcomes or ePRO solutions that capture,
analyze, distribute, manage and report clinical trial data from
patients. Prior to the merger with Araccel, etrials, Inc. was in the
business of primarily providing electronic data capture, or EDC software and
services for clinical trials.
CEA
Acquisition Corporation was incorporated in Delaware in October 2003 as a blank
check company, the objective of which was to effect a merger, capital stock
exchange, asset acquisition or other similar business combination in the
entertainment, media and communications industry. In February 2004,
CEA consummated an initial public offering (the “Offering”) and raised net
proceeds of $21,390,100. In February 2006, etrials Acquisition, Inc.,
a Delaware corporation and wholly owned subsidiary of CEA, consummated a merger
with etrials in which etrials became CEA’s wholly owned subsidiary. At that time
CEA changed its name to etrials Worldwide, Inc.
General
etrials
is a single source global provider of each of the three key clinical software
technologies used to optimize the clinical trial process – EDC, interactive
voice and Web response systems or IVRS/IWRS, and electronic patient
diaries, or eDiary – along with professional services and support as part of an
integrated or individual software as a service or SaaS platform.
Adaptive,
Web-based tools work together to coordinate data capture, logistics, patient
interaction and trial management – turning data into intelligence and shortening
the pathway to an actionable study endpoint.
Value
Proposition
Recognizing
that successful clinical trials rely on the speed in which actionable decisions
can be made, etrials provides innovative data collection, end-to-end trial
visibility and tightly managed control mechanisms that:
·
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Capture
clinical and patient reported information through multiple modalities,
including the Web, PDAs, smartphones, tablet PCs, and
phones;
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Integrate
clinical trial information from different sources such as labs, ECG/EKG,
diagnostic images, in-home testing devices such as blood glucose monitors
and other sources;
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Provide
centralized control and management of the trial, at the site and patient
levels to enhance data quality;
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Provide
an integrated solution of eClinical services, technologies (EDC, IVR and
ePRO) and expertise that provides our clients real time visibility into
and across the clinical trial process;
and
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·
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Offer
value-added services such as consultative program development, project
management, training options, hosting services, in-house help desk
support, ad hoc reporting, and medical
coding.
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etrials
supports these value propositions by leveraging the following key
strengths:
Advanced
Solutions on an Integrated Platform
etrials
is one of a limited number of eClinical technology vendors that offer a fully
integrated eClinical solution to meet complex data collection requirements from
a secure and centralized system.
Experience
As an
experienced industry leader, etrials has facilitated more than 900 trials
involving more than 400,000 patients in over 70 countries. Approximately 42 of
those studies resulted in approximately 14 new drug and regulatory approvals.
Having partnered with more than 100 different clients, etrials intends to lead
the way towards future industry innovations such as Adaptive Clinical Trials and
integration between eClinical and electronic health records and disease
management.
Process
Excellence
From fast
study start-up to strategic implementation of mid-study changes, our project
teams have deep clinical research knowledge and technical expertise necessary
for effective and efficient management of our clients’ clinical
trials.
Products
etrials’ Web-based
architecture and integrated eClinical solutions enable customers to efficiently
capture, integrate, manage and analyze key clinical and patient reported
information in one data repository. Real-time Web-based access allows clinical
trial sponsors and CROs to analyze actionable information based on high quality
data an estimated eight to twelve weeks earlier than traditional paper-based
methods, enhancing and speeding decision-making and supporting adaptive trial
design.
etrials’
eClinical solutions include:
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EDC
.
etrials’ EDC is a
Web-based, globally proven solution for collecting, managing, and
analyzing real-time clinical trial information. Our EDC solution allows
clinicians, researchers and business executives to drive data quality and
make more informed decisions faster by more effectively managing and
monitoring trial progress, site and clinical research associate
performance, compliance, and data reconciliation virtually in
real-time.
With
etrials’ configurable electronic case report forms, or eCRF, study
information is more accurate, timely and accessible, for better
collaboration and communication. The Company’s dynamic business process
engine supports multiple workflows and ensures that information collected
in the field is verified and complete. Real-time reporting supports
adaptive study designs by enabling integration of study information and
knowledge as the trial progresses.
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●
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eDiary.
etrials’ eDiary
is a multiple modality electronic patient reported outcomes, or ePRO
solution for patient intelligence. Sponsors can drive high compliance and
data quality across different therapeutic areas, patient populations, and
global locations, while ensuring optimal control, simplicity, reporting
and flexibility.
etrials’
eDiaries minimize problems associated with paper-based collection such as
patient compliance, transcription errors and limited data analysis.
Information is stored on the local device (handheld, tablet, or
smartphone) and a central database through wired and wireless
connectivity.
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IVRS/IWRS.
etrials'
IVRS/IWRS solutions go well beyond traditional IVRS systems, providing a
powerful trial and site monitoring and control tool. Real-time patient
enrollment, dynamic randomization and comprehensive drug supply management
systems are accessible via a single, convenient site logistics
administration console.
The
solution enables sponsors to easily manage site or stratum-based patient
enrollment, the compliance of sites and subjects, and what supplies have
shipped.
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Technology
Platform.
The etrials eClinical Software-as-a-Service or SaaS Web-based
platform is more capable of meeting the diverse needs of each clinical trial
than traditional enterprise software. Our SaaS architecture, built on an Oracle
foundation, enables our customers to focus their time on managing their trials
and not on running servers, databases and applications. This model reduces the
costs associated with deploying a clinical trial. All etrials’ solutions include
design, testing, and deployment to enable its customers to rapidly conduct and
closeout their studies. These supporting applications are essential to etrials’
subscription licensing strategy and software services.
Professional
Services.
To support the on-going implementation of our technology
solutions throughout the course of our clients’ clinical trials, we offer our
customers services that include; software implementation, project management,
training, system performance and maintenance, knowledge transfer, and global
customer support.
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Software
implementation.
We develop with our client database specifications,
design the screen forms and backend data structure, determine the data
transformations and configure the required infrastructure, including both
hardware and communications
systems.
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Project management.
When awarded a project, etrials will assign an experienced project team to
the initiative, led by an expert clinical project manager. The team works
closely with clients to develop project specifications and to understand
the expectations for etrials’ conduct of the proposed project. Ongoing
management of the technical aspects of a clinical trial is provided, from
start-up, to deployment, to conduct and close-out.
These
services typically involve consulting and managing how the technology and
services are used in the clinical trial. Project managers also monitor the
study’s budgeted hours, ensure milestones are hit, and coordinate changes
to the database when necessary.
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Training.
etrials’
training staff provides on-site investigator training courses, online
training modules, Web-based instructor-led training and train-the-trainer
options to ensure investigator sites and clinical researchers are
effectively educated in the use of our
software.
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System performance and
maintenance
. etrials’ provides a holistic solution, ensuring
business continuity, resiliency and security. etrials has invested heavily
to help clients attain the peak performance their clinical trials require
to always be running quickly, efficiently and in a security-rich and
industry-compliant environment.
Recognizing
our clients’ critical need to access trial data at any time and from
virtually any location around the world, etrials’ has assembled a highly
talented team of IT professionals to support their clinical trial
environments.
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Knowledge transfer.
For
those clients who want to internalize the design and management of their
clinical studies, this consulting service trains their staff in the use of
the design software and the steps involved in deploying
trials.
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Global customer
support.
We provide support 24 hours a day and seven days a week
through our global in-house help desk for the investigator sites, research
staff and other system users accessing the
software.
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Technology
Acquisitions
We have
in the past acquired new software technologies through acquisitions of all or
part of other companies.
In April
2004, we acquired from Authentrics, Inc. IVRS software and certain other assets
in exchange for 24,538 shares of etrials common stock. Authentrics also agreed
to provide certain consulting services related to the use, implementation, and
deployment of the IVRS technology for which we agreed to pay $360,000 to
Authentrics.
In April
2005, we purchased from Quintiles Transnational Corp., certain EDC software and
clinical trial management software, or CTMS, as well as Quintiles’ customer
backlog related to such software products. In exchange, we granted Quintiles a
license to such software and other etrials clinical trial software. We also
issued Quintiles 139,048 shares of our common stock.
In August
2005, MiniDoc AB and etrials Worldwide, Inc. entered into an exclusive license
agreement granting exclusive rights from MiniDoc to us for the MiniDoc Diary
Software and the intellectual property rights underlying the MiniDoc Diary
Software. MiniDoc retained a right to make, use and sell the licensed
intellectual property, without any right to transfer or sublicense it to
others.
We might,
in the future, also acquire other companies that have software or services that
we can cross-sell to our existing customers or that have customers to which we
can sell our existing products and services. Examples of products and services
we might acquire to sell to our existing customers include: clinical trial site
payment technology, safety database technology; adverse event reporting
services, and eSubmissions technology and services. There can be no
assurance that such future acquisitions will be available on terms acceptable to
us or that any acquisition will be successful.
Research
and Development
Our
research and development efforts are focused on improving and enhancing our
existing products and services as well as developing new products and
services. etrials places a high level of importance on a
well-documented product strategy plan and roadmap based on market research,
market problems, technology assessment, competitive analysis and
innovation.
etrials
continues to provide enhancements, upgrades and new versions of our products and
services to directly address our customers’ business problems. Both visible and
unseen to customers, top priorities include advancements to our products’ human
interface, strategic features and functionality for their multiple configuration
modalities, as well as their ability to integrate with other third-party
technologies.
Research
and development expenditures were approximately $2.1 million and $2.2 million
for the years ended December 31, 2008 and 2007, respectively.
Business
Segments and Geographic Information
We
conduct our operations through offices in the United States and the United
Kingdom. We view our operations and manage our business as one operating and
reporting segment, based on the guidance included in SFAS No. 131,
“Disclosures about Segments of an Enterprise and Related
Information”.
Customers
We have
an established base of clients who are transitioning from paper processes to
electronic clinical trials and, using licensed software and technical services
from etrials. Additionally, we license software to numerous CROs. The United
States Food and Drug Administration or FDA, has accepted trials using our
eClinical software, and these trials have resulted in successful regulatory
approvals for clients.
During
the years ending December 31, 2008 and 2007, we had two customers who comprised
approximately 28% and 29% of our revenues, respectively.
Customers
individually representing greater than 10% of our revenues are as
follows:
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Percent
of Revenues
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December
31
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2008
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2007
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Wyeth
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14.2%
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18.6%
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Sucampo
Pharmaceuticals, Inc
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13.7%
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*
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Johnson
& Johnson
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*
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10.0%
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Total
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27.9%
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28.6%
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* Less
than 10%
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Although
we enter into master agreements with each customer, the master contracts do not
contain minimum revenue commitments. Services and revenues are covered by
separately negotiated addendums called task orders. See Risk Factor (15) about
risks related to customer cancellations and delays and their effect on our
revenue.
Our
customers are companies in the life science industry, including pharmaceutical,
biotechnology and medical device organizations, as well as CROs. The needs and
sales approaches are unique depending on the focus of each segment; therefore,
we have two sales channels, direct and value added reseller, to support our
bookings and revenue targets.
In late
2007, our Sponsor Business Development Group began deploying a consultative
solution sales methodology directed toward key buyers and influencers at
clinical trial sponsor organizations (pharmaceutical, biotechnology and medical
devices) running Phase I through Phase IV clinical trials. These customers
typically work in one therapeutic area (e.g., cardiology, oncology, etc.), in
large or mid-sized pharmaceutical, biotechnology or medical device
manufacturers. These clinical trials are highly regulated and require strict
adherence to U.S and international guidelines. Sales through this direct channel
currently represent the largest share of our total revenue.
The
CRO Business Development Group focuses on establishing and working with CRO
partners to position etrials technology and service solutions as part of the
CRO’s outsourced client trial management services. etrials sells per-project and
/ or enterprise subscription agreements to CROs that use the technology in the
work they do for pharmaceutical companies.
The
eClinical market is in a period of rapid growth. EDC use has doubled since 2005
to nearly half (45%) of all clinical trials. In a 2007 report published by
Health Industry Insights (an IDC Company), investment in EDC will see compound
growth at an annual rate of 14%, totaling more than $3.1billion by 2011. By
2009, global spending on EDC technology alone is expected to exceed $500.0
million. These numbers do not include the other two core clinical technologies
that etrials offers – ePRO or IVRS. Our own market research indicates that 60%
of our customers utilize more than one of the three primary eClinical
technologies within etrials’ product portfolio.
We
believe these market factors, along with competitor product deficiencies, the
negative financial and cash position of many competitors and the M&A
activity in our segment are strong indicators for solid growth and market share
gain in 2009 and beyond. Indeed, etrials also is one of the few proven and fully
integrated eClinical deployment models available in the marketplace today. This
is a growing trend and requirement for our customers. Accordingly, we
believe our opportunity to cross-sell and up-sell new solutions to existing
clients is extremely positive.
We
routinely customize our technology and services to the specific needs of each
clinical trial. Therefore, both the sales process and the build and deployment
process are complex. Our average sales cycle is approximately six months for new
clients. The size of contracts, including software subscription and usage,
hosting, hardware devices and professional technical services, varies widely,
but ranges from $50,000 for single, very small trials for certain technology
offerings to multi-million dollar contracts for master service agreements and
very complex trials for all three core technologies and services.
Competition
The
market for eClinical technologies is disjointed, with many companies providing
partial solutions for different parts of the drug development process, but few
offering a robust set of each of the three major technologies in-house that is
needed to reach across all key endpoints of the clinical trial process. Most
competitors in the market offer individual products that cover one or two of the
three main eClinical technologies – EDC, IVRS, and ePRO. They supplement their
products with strategic partnerships to fill in the missing
technologies. During 2008, we viewed six companies as major
competitors to our EDC software and services, three companies as major
competitors to our ePRO patient diaries software and services, and seven
companies as major competitors to our IVRS software and services.
One of
our primary competitive advantages is having an integrated offering that may be
tailored to meet our client’s specific clinical trial challenges. We believe
this will allow our clients to more efficiently make important decisions about
their clinical trials, which will both save our clients substantial expenses and
decrease the time required to bring new products to market. This in turn
accelerates our clients’ ability to generate revenues.
We also
compete with the traditional paper processes that have long been used to collect
data in clinical trials. While usage of clinical trial technologies is projected
to see a sharp increase over the next several years, a significant number of
paper-based clinical trial processes are still be utilized today. We believe
this represents both competition and an opportunity to increase our
business.
The
eClinical industry has grown rapidly in recent years. Many industry
analysts predict consolidation will reduce the number of
vendors. Commoditization of eClinical technologies could result in
etrials having to reduce prices and/or operating margins and loss of market
share. Competitors vary in size and in the number of products and services they
offer to the market, and might include CROs or drug companies that have
developed their own internal technology solutions.
Our
competitive advantage will depend on, among other things:
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Our
ability to increase market share by convincing clients that our integrated
products and services offer a better solution than non-integrated
offerings of larger competitors;
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Our
ability to penetrate the mid market segment with an expanded sales
presence and new strategic
positioning;
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Our
ability to ensure high levels of on-going customer service and support
through operational excellence
initiatives;
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Our
ability to maintain a technological edge through robust product
development, business partnerships, mergers and/or acquisitions;
and
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Our
ability to successfully sell and prove the value of our consultative
eClinical solutions.
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We
believe that we compete favorably with other vendors on the basis of these
factors. Some of our competitors and potential competitors have more market
share, are more established, and have significantly greater resources. Our
current or prospective competitors might not offer or develop products or
services that are superior to, or that achieve greater market acceptance than,
our products and services.
Intellectual
Property Rights
Our
success depends, in part, upon our proprietary technology, processes, trade
secrets, and other proprietary information, and our ability to protect this
information from unauthorized disclosure and use. We rely on a combination of
copyright, trade secret, and trademark laws, confidentiality procedures,
contractual provisions and other similar measures to protect our proprietary
information. We have licensed from MiniDoc AB rights to MiniDoc diary technology
and issued patents.
Our
software and business processes embody numerous trade secrets which we protect
through various physical and technical security measures, as well as by
agreement. Our software, related manuals and other written materials are subject
to copyright protection. Our etrials trademark serves to identify and
distinguish our software and services in the market. The etrials mark
is a registered trademark as of December 27, 2005.
Over the
past several years, etrials has made numerous changes in our product names. Our
strategy with respect to our trademark portfolio might not be adequate to secure
or protect and intellectual property. Our means of protecting these proprietary
rights might not be adequate and our competitors might independently develop
similar technology.
The
software and Internet industries are characterized by the existence of a large
number of patents, trademarks and copyrights and by frequent litigation based on
allegations of infringement or other violations of intellectual property rights.
We and other companies in our industry have entered into settlements and
obtained licenses from patent holders, including from those who do not conduct
active businesses. Our technologies may not be able to withstand
third-party claims or rights against their use. Any intellectual property
claims, with or without merit, could be time-consuming and expensive to litigate
or settle, and could divert management attention from executing etrials’
business plan. In addition, etrials’ agreements often require us to indemnify
our clients for third-party intellectual property infringement claims. An
adverse determination on such a claim would increase our costs and could also
prevent etrials from offering our technologies and services to
others.
While we
do not believe that our products, trademarks, copyrights, or other proprietary
rights infringe the proprietary rights of third parties, third parties might
assert infringement claims against us in the future with respect to current or
future products. Further, etrials expects that we might become subject to
infringement claims as the number of products and competitors in our industry
segment grows and the functionality of products in different industry segments
overlaps. From time to time, etrials hires employees and retains consultants who
have worked for independent software vendors or other companies developing
products similar to those offered by us. Such vendors or companies may claim
that etrials’ products are based on their products and that etrials has
misappropriated their intellectual property. Any such claims, with or without
merit, could cause a significant diversion of management attention, result in
costly and protracted litigation, cause product shipment delays or require
etrials to enter into royalty or licensing agreements with third parties. Such
royalty or licensing agreements, if required, might not be available on terms
acceptable to etrials or at all, which would have a material adverse effect upon
our business and financial position.
We are
not aware of any current infringement legal actions against companies in our
industry involving patents with broad claims. From time to time, we
have been contacted by companies seeking to license their patents to
us. To date, however, except as disclosed above, we have not become a
party to any such infringement legal action or paid any license fees to persons
who have alleged possible infringement by our products. There can be
no assurance, however, that future infringement claims will not result in
litigation or settlements that result in us acquiring licenses from third
parties.
As part of our efforts to protect our proprietary
information, we
also
enter into license
agreements with our customers and nondisclosure
agreements with certain of our employees, consultants and corporate partners.
These agreements generally contain restrictions on disclosure, use and transfer
of our proprietary information
. These
agreements m
ight not provide us with the
protection intended. See Risk Factor (1
7
) and
“
Item 3. Legal
Proceedings.”
Potential
Liability and Insurance
We
attempt to manage our risk of liability for personal injury or death to study
subjects from administration of products under study through contractual
indemnification provisions with clients and through insurance maintained by our
clients and us. Contractual indemnification generally does not protect us
against certain of our own actions, such as gross negligence. The terms and
scope of such indemnification vary from client to client and from trial to
trial. Although most of our clients are large, well-capitalized companies, we
bear the risk that the indemnifying party might not have the financial ability
to fulfill its indemnification obligations to us. We maintain errors and
omissions professional liability insurance in the amount of $5 million per claim
and $5 million in the aggregate during any policy year. Our operating results
could be materially and adversely affected if we were required to pay damages or
incur defense costs in connection with a claim that is beyond the scope of an
indemnity provision or beyond the scope or level of insurance coverage
maintained by etrials or the client or where the indemnifying party does not
fulfill its indemnification obligations to etrials.
Regulatory
Matters
Our
clinical trial software is subject to various regulatory requirements designed
to ensure the quality and integrity of the data. Many regulatory authorities,
including those in the European Union, or EU, require that study results and
data submitted to such authorities be based on studies conducted in accordance
with what are called Good Clinical Practice, or GCP. These provisions represent
global industry standards for conducting clinical research and development
studies. Records for clinical studies must be maintained for specified periods
for inspection by the FDA and other regulators. Significant non-compliance with
GCP requirements can result in the disqualification of data collected during the
clinical trial. We are also obligated to comply with regulations issued by
national and supra-national regulators such as the FDA and the European
Medicines Agency, or EMEA. By way of example, these regulations include the
FDA’s regulations on electronic records and signatures (21 CFR Part 11), which
set out requirements for data in electronic format regarding submissions made to
the FDA, and the EMEA’s Note for Guidance “Good Clinical Practice for Trials on
Medicinal Products in the European Community.” We write our standard operating
procedures related to clinical studies in accordance with regulations and
guidelines appropriate to the region where they will be used, thus helping to
ensure compliance with GCP. Our commercial services are subject to detailed and
comprehensive regulation in each geographic market in which we
operate.
From time
to time, regulatory authorities or enforcement agencies investigated one or more
of our customers with respect to regulatory compliance of clinical trials and
programs. In these situations, etrials may provide services to our customers
with respect to the trials and programs being investigated, if we are called
upon to respond to requests for information by these authorities and
agencies.
The
Health Insurance Portability and Accountability Act of 1996, or HIPAA, requires
the use of standard transactions, privacy and security standards and other
administrative simplification provisions by covered entities, which includes
many healthcare providers, health plans and healthcare clearinghouses. The U.S.
Department of Health and Human Services or HHS has promulgated regulations in
the United States on Standards for Privacy of Individually Identifiable Health
Information to implement the privacy requirements of HIPAA. These regulations
generally (1) impose standards for covered entities transmitting or
maintaining protected data in an electronic, paper or oral form with respect to
the rights of individuals who are the subject of protected health information;
and (2) establish procedures for (a) the exercise of those
individuals’ rights, (b) the uses and disclosure of protected health
information by the covered entity, and (c) the methods permissible for
de-identification of health information. etrials is not a “covered entity” under
the HIPAA Standards for Privacy of Individually Identifiable Health Information,
also known as the HIPAA Privacy Rule.
We
receive identifiable health information from our clients and from their clients
who are covered entities or who are employed by covered entities. In order for
covered entities to disclose identifiable health information, there must be an
applicable permission from the research participant or an exception under the
HIPAA Privacy Rule. Based on our communications with our clients from which we
receive identifiable health information, we believe that we will continue to be
able to obtain such information, consistent with requirements of the HIPAA
Privacy Rule. However, if the covered entities do not understand the permissions
for disclosure of information, it is possible that they could object to
providing identifiable health information to etrials, which could have an
adverse effect on our ability to receive such information in a manner that will
not impact our business operations.
The
impact of legislation and regulations relating to identifiable health
information in the United States cannot be predicted. Other countries have or
are in the process of putting privacy laws into place affecting similar areas of
our business. For instance, the EU Directive applies standards for the
protection of all personal data, not just health information, in the EU and
requires the EU member states to enact national laws implementing the Directive.
Such legislation or regulations could materially affect our
business.
Employees
As of
December 31, 2008, we had approximately 100 full-time and part-time employees.
No employees are known to be represented by a collective bargaining agreement
and we have never experienced a strike or similar work stoppage. We consider our
relations with our employees to be good.
You
should carefully consider the following risk factors, together with all of the
other information included in this Report before investing in our common
stock.
We have
organized these risk factors into the following categories below.
|
·
|
our
financial condition;
|
|
·
|
our
products and operations;
|
|
·
|
our
market, customers and
partners;
|
|
·
|
our
officers, directors and
employees;
|
|
·
|
regulatory
matters that affect our business;
and
|
I.
Risks associated with our financial condition.
(1) We
have had recurring losses from operations and might never achieve and maintain
profitability.
At
December 31, 2008, we had an accumulated deficit of approximately $45.7 million,
including a net loss of approximately $15.8 million for the year ended December
31, 2008. We might not ever be able to achieve and maintain
profitability.
(2
) Current conditions in the global economy and the major
industries we serve might materially and adversely affect our business and
results of operations.
Our
business and operating results might be adversely affected by worldwide economic
conditions and, in particular, conditions in the pharmaceutical, biotechnology
and medical device industries we serve. As a result of slowing global
economic growth, the credit market crisis, declining consumer and business
confidence, shifts in consumer spending patterns, increased unemployment,
reduced levels of capital expenditures, fluctuating commodity prices,
bankruptcies and other challenges currently affecting the global economy, our
clients might experience deterioration of their businesses, cash flow shortages,
and difficulty obtaining financing. As a result, existing or
potential clients might delay or cancel plans to purchase our products and
services and might not be able to fulfill their obligations to us in a timely
fashion. For example, in December 2008, we had to pursue litigation
against two former customers in excess of $500,000, as described in Item 3.
Legal Precedings. Contract cancellations could affect our ability to fully
recover our contract costs. If the global economic slowdown continues
for a significant period or there is significant further deterioration in the
global economy, our financial position and cash flows could be materially
adversely affected.
(3) We
might require additional financing to fund operations or potential
acquisitions. If financing is not available, we might not be able to
grow as we plan.
At
December 31, 2008, we had cash, cash equivalents and short-term investments
totaling approximately $10.7 million and tangible assets of approximately $17.1
million. However, in the future, we might be required to seek additional
financing to fund operations or potential acquisition
opportunities. The recent downturn in the capital markets and the
general economic slowdown could prevent us from raising additional capital or
obtaining additional financing on favorable terms, if at all. If we
cannot raise sufficient capital, our ability to operate and to grow through
acquisitions or otherwise respond to competitive pressures would be
significantly limited.
(4) If
we are able to raise capital, but not on favorable terms, existing stockholders
might suffer dilution of their ownership interests or otherwise lose value in
their securities.
If we
raise additional funds through the issuance of equity securities or debt
convertible into equity securities, the percentage of stock ownership by
existing stockholders would be reduced. In addition, such securities could have
rights, preferences and privileges senior to those of our stockholders, which
could substantially decrease the value of our securities owned by
them.
(5) We
depend on nonrecurring revenue streams and if we experience significant
fluctuations in operating results and rate of growth and fail to balance
expenses with revenue and earnings expectations, our revenue and margins might
decrease and our stock price may fall.
Due to
our evolving business model and the unpredictability of the emerging industry,
we might not be able to accurately forecast our rate of growth. We
have historically depended on nonrecurring revenue derived from payments
received for providing services for specific customer projects, which is
recognized as work is performed over the term of the contracts for the projects.
As a result, our operating results can fluctuate significantly on a quarterly
basis. The volume of services required by customers depends in part upon the
progress and results of clinical trials the customer is conducting during the
quarter, which is outside our control. Accordingly, we believe that
period-to-period comparisons of operating results might not be meaningful, and
you should not rely upon them as an indication of our future performance.
Because future revenues are unpredictable, we might not be able to adjust our
spending quickly enough if our revenue falls short of expectations. This would
substantially decrease our margins and our stock price.
(6) Because
we will recognize revenue over the terms of our agreements, downturns or upturns
in sales might not be immediately reflected in operating results.
We
generally recognize revenue under the proportional performance method, spread
over the terms of our agreements, typically several months to several years. As
a result, much of the revenue we report each quarter was originally deferred
from agreements entered into during previous quarters. While we will begin
recognizing revenue upon the commencement of work after execution of agreements
for software term licenses and related services, it might be difficult to
rapidly increase revenue through additional new contract awards in any period.
Further, a decline in new or renewed agreements in any one quarter will not
necessarily be fully reflected in a decline in the revenue in that quarter, but
it might negatively affect our revenue in future quarters.
II.
Risks associated with our products and operations
(7) We
might not successfully develop or introduce new software applications or
enhancements to existing software applications, which could result in lost
business.
Our
future financial performance and revenue growth will depend, in part, upon the
successful development, introduction, and customer acceptance of new software
applications or new versions of existing software applications. Our business
could be harmed if we fail to deliver enhancements desired by customers or to
keep pace with changes in hardware and software platforms, database technology,
and electronic commerce technical standards. From time to time, we
have experienced delays in the planned release dates of software and upgrades.
Such a delay could result in adverse publicity, loss of sales, delay in market
acceptance of services and software applications, or customer claims against us,
any of which could harm our business.
We also
continually seek to develop new product and service offerings. However, we are
subject to all of the risks inherent in software development, including
unanticipated technical or other development problems, which could result in
material delays in product introduction and acceptance or significantly
increased costs. We might not be able to successfully develop new services or
software applications, or to introduce in a timely manner and gain acceptance of
such new services or software applications in the marketplace.
(8) Defects
in our software application-hosting service could diminish demand for our
service and subject us to substantial liability, damage our reputation, or
substantially decrease our revenue or margins or increase our
expenses.
Because
our software application-hosting service is complex, it might have errors or
defects that users identify after they begin using it, which could harm our
reputation and business. Internet-based software frequently contains undetected
errors when first introduced or when new versions or enhancements are released.
We have from time to time found defects in our software and new errors in our
existing service might be detected in the future. Because customers use our
software and service for important aspects of their business, any errors,
defects or other performance problems with our service could damage our
customers’ businesses. If that occurs, our reputation might be damaged and
customers could elect not to renew our services, or delay or withhold payment,
or make warranty claims against us, which could result in an increase
in our provision for doubtful accounts, an increase in collection cycles for
accounts receivable or the expense and risk of litigation. Additionally, any
errors, defects, or performance problems with our services could result in the
loss of future sales or customers.
(9) If
we acquire companies, software applications
,
or technologies,
we
will
face risks associated with those
acquisitions
including
difficulty of
integration
, dilution of stockholder value and
disruption of business, which could substantially decrease our revenue or
margins or increase our expenses.
In the
future, we
might
acquire products or
technologies from other companies
, but
might
not realize anticipated benefits of
any
future acquisitions or investments. If any
acquisition or investment is not perceived as improving earnings per share, our
stock price
would
decline. In addition, we
might
incur non-cash amortization
charges
or other charges or expenses
from
acquisitions, which could harm operating results. Any completed acquisitions
would also require significant integration efforts, diverting attention from
existing business operations and strategy. We have made only small
acquisitions to date, so our ability as an organization to make acquisitions or
investments is unproven. Acquisitions and investments involve numerous risks,
including:
·
|
difficulties
in integrating operations, technologies, services and
personnel;
|
|
·
|
diversion
of financial and managerial resources from existing
operations;
|
|
·
|
risk
of entering new markets;
|
|
·
|
potential
write-offs of acquired assets;
|
|
·
|
potential
loss of key employees;
|
|
·
|
inability
to generate sufficient revenue to offset acquisition or investment
costs;
|
|
·
|
risks
associated with intellectual property
claims;
|
|
·
|
delays
in customer purchases due to
uncertainty;
|
|
·
|
risk
of operating and integrating geographically remote
offices;
|
|
·
|
risk
of losing customers of the acquired companies due to actual or perceived
changes in operations and customer interfaces;
and
|
|
·
|
risks
of implementing and monitoring compliance with corporate governance and
public company reporting requirements and the ability of management to
manage and timely and accurately consolidate the results of
operations.
|
As a
result, if we fail to properly evaluate and execute acquisitions or investments,
our revenue and margins might substantially decrease or our expenses
increase.
(10) We
rely on third-party hardware and software that might be difficult to replace or
which could cause errors or failures in service, which would harm our
relationship with customers.
We rely
on hardware purchased or leased and software licensed from third parties in
order to offer our service. We use commercially available software from vendors
like Microsoft, Oracle and Business Objects. In addition, our products
include numerous third-party licensed components. These software and hardware
systems, as well as any third party embedded components, will need
periodic upgrades in the future as part of normal operation of business, which
will be an added expense.
The
hardware and software we use, including third party embedded components,
might not continue to be available on commercially reasonable terms, or at all,
or upgrades might not be available when we need them. Certain of the databases
and libraries included in our products could not easily be replaced
and any change in these components would require additional development
efforts on our part. Any loss of the right to use any of this hardware or
software could result in delays in providing our services until we develop
equivalent technology or, if already available, such equivalent technology is
identified, obtained and integrated. Any errors or defects in, or
unavailability of, third-party hardware or software could result in errors or a
failure of our service, which could harm our relationships with
customers.
Additionally,
we serve all of our application-hosting customers from third-party web hosting
facilities in North Carolina and Kentucky. We do not control the operation
of these facilities, and they are vulnerable to damage or interruption.
Although we maintain redundant systems that can be used to provide service in
the event the third-party web hosting facilities become unavailable, in such
circumstances, our service might be interrupted during the
transition.
(11) Security
and other concerns might discourage use of our internet based software, which
could significantly reduce revenues.
Our
service involves the storage and transmission of customers’ proprietary
information, and security breaches could expose us to a risk of loss of this
information, litigation and possible liability. If our security measures are
breached as a result of third-party action, employee error, malfeasance or
otherwise, and, as a result, someone obtains unauthorized access to one of our
customers’ data, our reputation will be damaged, our business might suffer and
we could incur significant liability. Because techniques used to obtain
unauthorized access or to sabotage systems change frequently and generally are
not recognized until launched against a target, we might not be able to
anticipate these techniques or to implement adequate preventative measures. If
an actual or perceived breach of our security occurs, the market perception of
the effectiveness of our security measures could be harmed and we could lose
sales and customers.
III.
Risks associated with our market, customers and partners
(12) We
have several large clients from which we derive substantial revenue; the loss of
even a few of our clients could significantly reduce our revenues.
We
currently derive and expect to continue to derive a significant portion of our
revenues from a limited number of clients. Our top two clients accounted for
approximately 29% of our revenue for the year ended December 31, 2007 and 28% in
2008. If we lose one of these clients or other significant clients
and do not replace them with new clients, our revenues will decrease and may not
be sufficient to cover our costs.
(13) Price
controls on what our clients charge might cause our clients to decrease their
purchases of information technology, including our software and services, and
might pressure us to decrease prices.
The
prices our clients charge for their pharmaceutical products are subject to price
controls in many countries and there is increasing pressure for greater price
controls in the United States. Controls on what our clients charge might cause
our clients to decrease their purchases of information technology, including our
software and services. This could substantially decrease the size of our market
and impact our ability to sell products and services or force us to reduce our
profit margins.
(14) We
depend entirely on the clinical trial market, and a downturn in this market
could cause our revenues to decrease.
Our
business depends entirely on the clinical trials that pharmaceutical,
biotechnology and medical device companies conduct. Our revenues could decline
if there is less competition in the pharmaceutical, biotechnology or medical
device industries, which would result in fewer products under development and
decreased pressure to accelerate a product approval. Our revenues could also
decline if the FDA or similar agencies in foreign countries loosen their
requirements, thereby decreasing the complexity of conducting clinical trials.
Any other developments that adversely affect the pharmaceutical, biotechnology
or medical device industries generally, including product liability claims, new
technologies or products or general business conditions, could also decrease the
volume of our business.
(15) We
will lose revenue if our clients experience delays in clinical trials or if we
lose contracts. Consequently, contracts we have signed might not result in our
collecting or recognizing the amount of revenue stated in the
contracts.
Although
our contracts provide that we are contractually entitled to receive fees for
services provided through the date of termination, customers generally are free
to delay or terminate a clinical trial or their contract related to the trial at
any time. The length of a typical clinical trial contract varies from several
months to several years. Clinical trial sponsors may delay or terminate clinical
trials for several reasons, including:
·
|
unexpected
results or adverse patient reactions to a potential
product;
|
|
·
|
inadequate
patient enrollment or investigator
recruitment;
|
|
·
|
manufacturing
problems resulting in shortages of a potential
product;
|
|
·
|
decisions
by the sponsor to de-emphasize or terminate a particular trial or drug;
or
|
|
·
|
adjustments
of our multi-year subscription license
agreements.
|
We will
lose revenues if a clinical trial sponsor decides to delay or terminate a trial
in which we participate. Consequently, contracts we have signed might not result
in collecting or recognizing the amount of revenue stated in the contracts. We
have experienced terminations and delays of our customer service contracts in
the past and expect to experience additional terminations and delays in the
future.
(16) We
face significant competition, which could cause us to lose business or have
lower margins.
The
market for our solutions is intensely competitive and rapidly changing. The
direct competition we face depends on the market segment focus and delivery
model capabilities of our competitors. We also at times have to overcome
customer reluctance to move away from existing paper-based systems. We have
three primary categories of competitors: larger technology and
services companies that provide their offerings to both the pharmaceutical
industry and contract research organizations that support
them;
large clinical research organizations that
provide
their own proprietary
data
collection and other services to pharmaceutical and biotechnology companies
;
and smaller applications software companies
that license software to perform these functions. Many of our competitors have
longer operating histories, greater financial, technical, marketing, and other
resources, greater name recognition, and a larger total number of customers for
their products and services than we do. These competitors
might
also be able to respond more quickly to new
or emerging technologies and changes in customer requirements, or to devote
greater resources to the development, promotion, and sale of their products,
than we. In addition, we anticipate new competitors will enter the market in the
future. Increased competition
could
result
in price reductions, reduced operating margins, and change in market share and
could
therefore
have a material adverse
effect on our business, financial condition
,
and results of
operations. New product announcements by competitors
might
make it difficult to sell our products even
before the competitor releases the product.
(17)
We face risks associated with former employees competing
with our business and the related litigation that aims to prevent them from
using our confidential, proprietary and or non-public data.
On January 6, 2009, we filed a lawsuit in the Superior
Court of Wake County, North Carolina, etrials Worldwide, Inc. v. Robert Sammis
and Brendon Ball, File No. 09-CVS-00275, against our former Chief Operating
Officer and Vice President of Client Services, Robert Sammis, and our former
Director of Product Development, Brendon Ball, to enforce Confidentiality
Agreements that they signed while at etrials and to prevent the disclosure or
unauthorized use of confidential or non-public information of etrials in
connection with the employment of Sammis and Ball at Unithink, Inc., a direct
competitor of etrials.
Although the court issued us a preliminary injunction
against the defendants, we still face the risk that they or anyone acting in
concert or participating with them (including Unithink) might make customers
delay or not make purchases from us, use our confidential information against us
or legitimately compete effectively with us. Additionally, litigation
can be expensive, time-consuming and uncertain in ultimate
result. Even if we continue our success in this litigation, our
business might be materially and adversely harmed
nevertheless.
(18
)
There are risks associated with
international operations, which we expect will become a bigger part of our
business in the future.
We plan
to conduct greater international operations in the future as companies move more
of their clinical trial operations off-shore. These international operations are
subject to a number of difficulties and special costs, including: government
regulations; trade restrictions; costs of customizing software products for
foreign countries; laws and business practices favoring local competitors;
uncertain regulation of electronic commerce; compliance with multiple,
conflicting, and changing governmental laws and regulations; longer sales
cycles; greater difficulty in collecting accounts receivable; import and export
restrictions and tariffs; potentially weaker protection for
our
intellectual property than in the United
States, and practical difficulties in enforcing such rights abroad; difficulties
staffing and managing foreign operations; multiple conflicting tax laws and
regulations; and political and economic instability.
Our
international operations will also face foreign currency-related risks. To date,
most of our revenues have been denominated in United States dollars, but we
believe that an increasing portion of our revenues will be denominated in
foreign currencies.
We must
also customize our services and software applications for international markets.
This process is much more complex than merely translating languages. Any
variation in laws or practices from one country to another
might
substantially decrease the value of our
software applications in that country, unless we identify the important
differences and customize our software applications to address the differences.
The agreements that we sign with clients outside the United States
might
be governed by the laws of the countries
where we provide our software applications and services. We
might
also need to resolve any disputes under
these agreements in the courts or other dispute resolution forums in those
countries. Our international operations also increase exposure to international
laws and regulations, which are often complex.
IV.
Risks associated with our officers, directors and employees
(
1
9
) Any failure to adequately expand
our direct sales force or to compensate sales personnel in appropriate ways will
result in our being understaffed
, which
could
reduce our sales and revenues.
We expect
to be substantially dependent on our direct sales force to obtain new customers.
We believe that there is significant competition for direct sales personnel with
advanced sales skills and technical knowledge. Our ability to achieve
significant growth in revenue in the future will depend, in large part, on our
success in recruiting, training and retaining sufficient direct sales personnel.
New hires require significant training and, in some cases, might take more than
a year before they achieve full productivity. Our existing personnel and planned
hires
might
not become as productive as we
would like, and we
might not
be
able
to hire sufficient numbers of qualified
individuals in the future in the markets where we do business. We also
must
develop compensation packages that properly
incentivize successful sales, including both selling to new customers and
increasing sales to existing customers. If we are unable to hire and develop
sufficient numbers of productive sales personnel, or develop compensation
packages that properly incentivize successful sales, then we
might
not be able to maintain an adequate sales
force
,
and the sales of our services
could
suffer.
(
20
) Because competition for our target
employees is intense, we
might
not be able
to attract and retain the highly skilled employees we need to support our
planned growth. If this occurs, we
might
not be able to increase our sales or provide services to our
customers.
To
execute our growth plan, we must attract and retain highly qualified personnel.
Competition for these personnel is intense, especially for engineers with high
levels of experience in designing and developing software and Internet-related
services and senior sales executives, as well as people with clinical trial and
related health care industry experience. Personnel with experience in both
software and health care industries are in high demand by other employers. We
might
not be successful in attracting and
retaining qualified personnel. We have from time to time in the past
experienced, and expect to continue to experience in the future, difficulty in
hiring and retaining highly skilled employees with appropriate qualifications.
Many of the companies with which we compete for experienced personnel have
greater resources than we have. In addition, in making employment decisions,
particularly in the Internet and high-technology industries, job candidates
often consider the value of the stock options they are to receive in connection
with their employment. Significant volatility in the price of our stock,
therefore,
might
adversely affect our
ability to attract or retain key employees. Many of our officers and employees
have stock options whose exercise prices are higher than the current market
price of our Common Stock
, which
significantly reduces the value of our stock options as an employee retention
tool. Furthermore, the recent changes in policies regarding the
accounting for stock options
might
discourage us from granting the size or type of stock options awards that job
candidates require to join the company. If
job
candidates do not join the company, we might
not
be
able to increase our sales or provide
services to our
customers.
(
2
1
) Our executive management team is
critical to the execution of our business plan and the loss of their services
could severely impact our ability to maintain and grow our
business.
Our
future
success depends
on the personal efforts and abilities of the principal
members of our senior management to provide strategic direction, develop
business, manage our operations, and maintain a cohesive and stable work
environment. We hired a number of new senior employees during 2008,
including M.
Denis Connaghan
, our
Chief Executive Officer,
and Joseph F. Trepanier
III
, our Chief Financial Officer
. These new employees’ integration into our
company has been and will continue to be critical to our
success. Although we have employment agreements with most of our
executives, they do not assure that any executive with whom we have an
employment agreement will remain with us. We do not have employment
agreements with all of our key personnel.
Losing any one of
our officers could seriously harm our business. Competition for
executives is intense. If we have to replace any of our officers, we would not
be able to replace the significant amount of knowledge that they have about our
operations. We do not maintain key man insurance policies on
anyone.
V.
Regulatory matters that affect our business
(
2
2
) Extensive governmental regulation
of the clinical trial process could require costly modifications to our
products, adversely affect prospective clients’ willingness to use our software
products and services and increase competition and reduce our market
share.
We
might
incur increased expenses or suffer a
reduction in revenues
,
if our software
products and services do not comply with applicable government regulations or if
regulations allow more competition in the market place. The FDA has published
regulations and guidelines addressing a broad range of matters relating to the
use of computerized systems to collect, manage and analyze data from clinical
trials. Moreover, electronic data entry, management and analysis of
medical information pertaining to subjects in clinical trials will be subject to
state and federal government regulations that are not yet finalized. Conforming
our products and services to these guidelines or to future changes in regulation
could substantially increase our expenses. In the United States and in foreign
countries, regulatory authorities also
have
established other standards for conducting clinical trials leading to the
approval of new products with which we must comply. We are either directly or
indirectly subject to, or affected by, these regulations, because our software
products and services assist sponsors and
contract
research organizations
in conducting trials and preparing new drug or
device applications. If a regulatory authority concludes that trials were not
conducted in accordance with established requirements, it
might
take a variety of enforcement actions
depending upon the nature of the violation and the applicable country. In the
United States, these measures
might
range
from issuing a warning letter or seeking injunctive relief or civil penalties to
recommending criminal prosecution, which could result in a prohibition of our
continued participation in clinical trials.
(
2
3
) Changes in government regulations
relating to the health care industry could have a material adverse effect on the
demand for our services,
and
substantially
reduce our revenue.
Demand
for our services is largely a function of the regulatory requirements associated
with the approval of a New Drug Application by the FDA. These requirements are
more stringent and thus more burdensome than those imposed by many other
developed countries. In recent years, efforts have been made to streamline the
drug approval process and coordinate U.S. standards with those of other
developed countries. Changes in the level of regulation, including a relaxation
in regulatory requirements or the introduction of simplified drug approval
procedures could reduce the demand for our services.
The FDA’s
guidelines and rules related to the use of computerized systems in clinical
trials are still in the early stages of development. Our products and services
might
not continue to comply with these
guidelines and rules as they develop, and corresponding changes to
our
products and services
might
be required. Any release of FDA guidance
that is significantly inconsistent with the design of our products and services
might
cause us to incur substantial costs
to remain in compliance with FDA guidance and regulations.
Our
products and service offerings
might not
comply with applicable regulations and
regulatory guidelines as they develop. If our products or services fail to
comply with any applicable government regulations or guidelines, we could incur
significant liability or be forced to cease offering applicable products or
services.
(
2
4
) Current trends
indicate
our customers have higher risks of
product liability and similar claims related to how they conduct clinical trials
and analyze information from clinical trials both before and after drugs are
sold in the market. This
higher risk
could
result in product liability claims relating to our software applications or
services.
Current
trends
indicate
our customers have higher
risk of product liability and similar claims related to how they conduct
clinical trials and analyze information from clinical trials both before and
after drugs are sold in the market. Any failure or errors in a customer’s
clinical trial or adverse event reporting obligations caused or allegedly caused
by our software applications or services could result in a claim for substantial
damages against us by our customers or the clinical trial participants,
regardless of our responsibility for the failure. Although our contracts with
customers generally provide that we are entitled to indemnification against
claims brought against us by third parties arising out of our customers’ use of
our software applications, we might find ourselves entangled in lawsuits that,
even if
we prevail
, divert our resources
and energy and adversely affect our business. Further,
a court might not
enforce our indemnification
right or the customer
might not
be able to
fund any amounts for indemnification owed to us.
Our
insurance policies to cover claims against
us
might
not be adequate
or
continue to be available on reasonable
terms
, and
the insurer
might
disclaim coverage
.
(
2
5
) Privacy concerns and laws or other
domestic or foreign regulations
might
reduce the effectiveness of our services and products
, which could
substantially
reduce our revenue.
Our
customers can use our service to store contact and other personal or identifying
information regarding their customers, contacts and clinical trial participants.
Federal, state and foreign government bodies and agencies, however, have adopted
or are considering adopting laws and regulations regarding the collection, use
and disclosure of personal information obtained from consumers and individuals.
The costs of compliance with, and other burdens imposed by, such laws and
regulations that are applicable to the businesses of our customers
might
limit the use and adoption of our service
and reduce overall demand for it. Furthermore, privacy concerns
might
cause our customers’ customers to resist
providing the personal data necessary to allow our customers to use our service
effectively. Even the perception of privacy concerns, whether or not valid,
might
inhibit market adoption of our
services.
The
European Union has also adopted a data privacy directive that requires member
states to impose restrictions on the collection and use of personal data that,
in some respects, are far more stringent, and impose more significant burdens on
subject businesses, than current privacy standards in the United States. All of
these domestic and international legislative and regulatory initiatives
might
adversely affect our customers’ ability to
collect and/or use demographic and personal information from their customers,
which could reduce demand for our service.
In
addition to government activity, privacy advocacy groups and the technology and
other industries are considering various self-regulatory standards that
might
place additional burdens on us. If the
gathering of personal information were to be curtailed in this manner, certain
of our services and products would be less effective, which
might
reduce demand for them. If
d
emand for our
products decreases
due to privacy
concerns
, our revenue
might
be
reduced substantially.
(
2
6
) Evolving regulation of the Internet
might
either reduce our revenue or increase
our expenses.
As
Internet commerce continues to evolve, increasing regulation by federal, state
or foreign agencies becomes more likely. For example, we believe increased
regulation is likely in the area of data privacy, and laws and regulations
applying to the solicitation, collection, processing or use of personal or
consumer information could affect our customers
’
ability to use
and share data, potentially reducing demand for our services and restricting our
ability to store, process and share data with our customers. In addition,
taxation of services provided over the Internet or other charges imposed by
government agencies or by private organizations for accessing the Internet
might
also be imposed. Any regulation imposing
greater fees for Internet use or restricting information exchange over the
Internet could result in a decline in the use of the Internet and the viability
of Internet-based services, which could either reduce our revenue or increase
our expenses.
(
2
7
) Our ability to protect our
intellectual property is limited. We have been sued for patent infringement and
our products
might
be subject to other
infringement claims by third parties.
We do not
own any issued patents. Despite our efforts to protect our proprietary rights,
unauthorized parties
might
attempt to copy
aspects of our products or to obtain and use information that we regard as
proprietary, and third parties
might
attempt to develop similar technology independently. Policing unauthorized use
of our products is difficult, particularly because the global nature of the
Internet makes it difficult to control the ultimate destination or security of
software or other transmitted data. In addition, the laws of some foreign
countries do not protect our proprietary rights to as great an extent as do the
laws of the United States, and we expect that it will become more difficult to
monitor use of our products as we increase our international presence. The
software and Internet industries are characterized by the existence of a large
number of patents, trademarks and copyrights and by frequent litigation based on
allegations of infringement or other violations of intellectual property rights.
From time to time, we have been contacted by companies seeking to license their
software or patents to us. Infringement claims
could
result in litigation or settlements that
result in us acquiring licenses from third parties. Our technologies
might
not be able to withstand any
third-party claims or rights against their use. Any intellectual property
claims, with or without merit, could be time-consuming and expensive to litigate
or settle, and could divert management attention from executing our business
plan. In addition, our agreements often require us to indemnify our partners and
customers for third-party intellectual property infringement claims, which would
increase the cost of an adverse ruling in such a claim.
VI. Risks Related to Our
Securities
(
2
8
) Our outstanding stock options
might
be exercised in the future, which would
increase the number of shares eligible for future resale in the public market
and result in dilution to our stockholders. This might substantially decrease
the market price of the common stock.
We
have outstanding stock options to purchase approximately
1.8
million shares of our
common stock . To the extent they are exercised, additional shares of
our common stock will be issued that will be eligible for resale in the public
market, which will result in dilution to our stockholders. Sales of substantial
numbers of such shares in the public market could adversely affect the market
price of such shares.
(
2
9
) We might not
continue to meet NASDAQ listing
requirements
, which could result
in our delisting, limiting the
liquidity
of our
securities
.
Our
common stock trades
on the NASDAQ Global
Market
,
which has qualitative and
quantitative listing criteria
, including
operating results, net assets, corporate governance, minimum trading price and
minimums for public float, which is the amount of stock not held by affiliates
of the issuer.
Although NASDAQ has
temporarily halted delisting procedures for certain of these criteria in light
of current market conditions, we are at risk of delisting in the future.
If for any reason, our securities are not eligible for
continued quotation on the NASDAQ, purchasers of our securities
might
have difficulty selling their securities
should they desire to do so.
(
30
) Fluctuations in
the stock market as well as general economic, market and industry conditions
might harm the market price of our common stock.
The
market price of our common stock has been subject to significant
fluctuation. The stock market in recent years has experienced price
and volume fluctuations that, at times, have been unrelated or disproportionate
to the operating performance of companies. These fluctuations might
harm the market price of our common stock, regardless of our operating
results.
FORWARD-LOOKING
STATEMENTS
We
believe that some of the information in this document constitutes
forward-looking statements within the definition of the Private Securities
Litigation Reform Act of 1995. Our actual results could differ
materially from those discussed in the forward-looking
statements. Factors that could cause or contribute to these
differences include those discussed in this Report, particularly in
“
Risk Factors.
”
You
can identify these statements by forward-looking words such as
“
might,
”
“
expect,
”
“
anticipate,
”
“
contemplate,
”
“
believe,
”
“
estimate,
”
“
intends,
”
and
“
continue
”
or similar words.
You should read statements that contain these words carefully because
they:
|
•
|
|
discuss
future expectations;
|
|
•
|
|
contain
projections of future results of operations or financial condition;
or
|
|
•
|
|
state
other “forward-looking”
information.
|
We
believe it is important to communicate our expectations to our stockholders.
However, there may be events in the future that we are not able to predict
accurately or over which we have no control. The risk factors and cautionary
language discussed in this Report provide examples of risks, uncertainties and
events that may cause actual results to differ materially from the expectations
described by us in our forward-looking statements
.
You are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Report.
All
forward-looking statements included herein attributable to any of us, or any
person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to in this section. Except to the
extent required by applicable laws and regulations, we undertake no obligations
to update these forward-looking statements to reflect events or circumstances
after the date of this document or to reflect the occurrence of unanticipated
events.
None.
Our
corporate headquarters is located at 4000 Aerial Center Executive Park,
Morrisville, North Carolina, and consists of a single building with
approximately 25,000 square feet. The lease for these premises terminates on
March 31, 2013.
See Note 9 of
Notes to Financial Statements of etrials for information about lease
payments
.
We are
the assignee of a lease for approximately 10,950 square feet of office space
located at 735 Guilat Avenue Sittingbourne Research Centre Sittingbourne Kent,
England. This lease terminates in 2011.
Item
3. LEGAL PROCEEDINGS
On
December 4, 2008, we filed a lawsuit in the Superior Court of Wake County, North
Carolina, etrials, Inc. v. Tapestry Pharmaceuticals, Inc., File No.
08-CVS-21113, against Tapestry Pharmaceuticals, Inc., seeking damages in the
amount of $216,794.00 for unpaid invoices, as well as accrued finance charges
and attorneys' fees. etrials, Inc. provided various drug development
support activities to Tapestry pursuant to a Master Services Agreement and
various task orders. In or around the first quarter of 2008, Tapestry
informed the Company that it was unable to continue with the projects
that were the subject of the agreement, and the Company ceased
performing services. We requested payment of the outstanding invoices
from Tapestry, but to date, Tapestry has failed to pay. The complaint
was served on February 3, 2009, and we do not know whether Tapestry will defend
the lawsuit and whether it contests any of the damages.
On
December 29, 2008, we filed a lawsuit in the Superior Court of Wake County,
North Carolina, etrials, Inc. v. Archer Biosciences, Inc., File No.
08-CVS-22556, against Archer Biosciences, Inc., seeking damages for unpaid
invoices in the amount of $358,699.58, as well as for accrued finance charges
and attorneys' fees. etrials, Inc. provided various services to
Archer pursuant to four separate task orders, and incurred further
expenses for which Archer agreed to be responsible under a Master Services
Agreement and task orders. When Archer informed the Company that it
would not be continuing with most of the project, the Company demanded payment
as reflected in its invoices to Archer. Archer disputes an unknown
amount of the invoices, and we entered negotiations to attempt to resolve the
claim. When negotiations broke down, the Company filed suit seeking
damages for the unpaid invoices. Archer has obtained an
extension of time to file the answer, and settlement discussions are ongoing
with Archer's counsel.
On
January 6, 2009, we filed a lawsuit in the Superior Court of Wake County, North
Carolina, etrials Worldwide, Inc. v. Robert Sammis and Brendon Ball, File No.
09-CVS-00275, against its former Chief Operating Officer and Vice President of
Client Services, Robert Sammis, and its former Director of Product Development,
Brendon Ball, seeking injunctive relief and damages in excess of
$10,000. We filed the lawsuit to enforce Confidentiality Agreements
that Sammis and Ball signed while at etrials, and to prevent the disclosure or
unauthorized use of confidential or non-public information of etrials in
connection with the employment of Sammis and Ball at Unithink, Inc., a direct
competitor of etrials. On February 2, 2009, the court issued us a
preliminary injunction against the defendants. The lawsuit against
Sammis and Ball remains pending, and etrials will continue to take all such
further actions relating to Sammis, Ball and/or Unithink as are necessary to
protect the information and customers of etrials to the full extent permitted by
law.
Item 4
. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No matters were submitted to a vote of our security
holders during the quarter ended December 31, 2008.
Item
5.
MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market
Information
Our common stock is traded on the NASDAQ Global Market
under the symbol “ETWC”.
The following table sets forth the
range of high and low closing bid prices for
our
units, common stock and warrants for the
periods indicated.
Effective February 11, 2008 at
5:00 p.m. Eastern Standard Time, the warrants expired
, and accordingly
,
trading in both the warrants and units were discontinued. See Note 10 in the
Notes to Consolidated Financial Statements for a description of the warrants and
units.
The over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
reflect actual transactions.
|
|
Units
|
|
Common
Stock
|
|
Warrants
|
|
|
High
|
Low
|
|
High
|
Low
|
|
High
|
Low
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
na
|
na
|
|
1.58
|
0.36
|
|
na
|
na
|
Third
Quarter
|
|
na
|
na
|
|
2.10
|
0.93
|
|
na
|
na
|
Second
Quarter
|
|
na
|
na
|
|
2.25
|
1.26
|
|
na
|
na
|
First
Quarter
|
|
na
|
na
|
|
3.46
|
1.55
|
|
na
|
na
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
4.94
|
2.31
|
|
4.10
|
2.41
|
|
0.12
|
0.01
|
Third
Quarter
|
|
5.58
|
3.25
|
|
4.78
|
2.90
|
|
0.45
|
0.05
|
Second
Quarter
|
|
7.30
|
4.94
|
|
5.54
|
4.21
|
|
0.81
|
0.39
|
First
Quarter
|
|
6.26
|
3.89
|
|
5.10
|
3.06
|
|
0.64
|
0.26
|
As of March 3, 2009, the aggregate
market value of the common stock held by non-affiliates of the Registrant was
approximately $3,452,314.
As of March 3, 2009, there were
10,767,520 shares of Common Stock, $0.0001 par value per share
outstanding.
Holders
As of March 6, 2009, there were 143
holders of record of shares of our Common Stock.
Dividends
We have
not paid any dividends on our common stock to date. The payment of dividends in
the future will be contingent upon, among other things, revenues and earnings,
if any, capital requirements and general financial condition. The payment of any
dividends will be within the discretion of our then board of directors. It is
the present intention of our board of directors to retain all earnings, if any,
for use in our business operations, including potential acquisitions and,
accordingly, our board does not anticipate declaring any dividends in the
foreseeable future. Additionally, under the terms of our line of
credit agreement, which expired on May 31, 2008, we were not permitted to pay
dividends.
Securities
Repurchases
Unregistered
Sales of Equity Securities and Use of Proceeds.
No
unregistered sales of securities were made during the quarter.
On August
12, 2008, the Company announced a plan to repurchase up to $1,000,000 of the
Company’s common stock through June 30, 2009. The Company will determine
when and if the re-purchases are in the long-term interests of our
stockholders. This new program replaces the prior stock repurchase program
that expired on June 30, 2008. Repurchases are made in compliance with
securities laws, which limit the timing, volume, price and manner of stock
repurchases. The following table summarizes our stock repurchase activity during
the fourth quarter of 2008:
ISSUER
PURCHASES OF EQUITY SECURITIES
|
|
|
Total
Number
|
Approximate
|
|
|
|
of
Shares
|
Dollar
Value
|
|
|
Average
|
Purchased
as
|
of
Shares that
|
|
Total
Number
|
Price
|
Part
of Publicly
|
May
Yet Be
|
|
of
Shares
|
Paid
per
|
Announced
|
Purchased
|
Period
|
Purchased
|
Share
|
Plan
|
Under
the Plan
|
October
1 - October 31, 2008
|
-
|
-
|
-
|
$984,128
|
November
1 - November 30, 2008
|
48,400
|
$0.95
|
48,400
|
$938,143
|
December
1 - December 31, 2008
|
204,000
|
$0.85
|
204,000
|
$764,160
|
|
|
|
|
|
Equity
Compensation Plan
The Company’s 2005 Performance Equity
Plan (the “Plan”) was approved by the shareholders of the Company on February 9,
2006. The purpose of the Plan is to provide incentives to eligible
employees, officers, directors and consultants in the form of non-qualified
stock options, incentive stock options, restricted stock and other equity
grants. On November 15, 2007, the shareholders voted to increase the
number of shares issuable under the Plan to 3,500,000 shares. Of this
amount, 1,341,698 shares were available for future stock option or other grants
as of December 31, 2008.
Equity
Compensation Plan Information
Plan
Category
|
|
Number
of securites to be issued upon exercise of outstanding options, warrants
and rights (a) *
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column (a)) {c}
**
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
1,848,504
|
$ 2.67
|
1,341,698
|
|
|
|
|
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|
|
|
|
|
TOTAL
|
|
1,848,504
|
$ 2.67
|
1,341,698
|
|
|
|
|
|
* Does
not include restricted stock grants or shares previously issued on
exercise of options.
|
|
|
|
|
|
**
Reflects shares remaining available for issuance under the etrials
Worldwide, Inc. 2005 Performance Equity Plan as of December 31,
2008.
|
As a
“
smaller reporting company
”
under Item 10 of Regulation S-K, we are not required to
provide the informatio
n under this
item.
Item 7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our audited condensed consolidated
financial statements and related notes that appear elsewhere in this Annual
Report. In addition to historical consolidated financial information, the
following discussion contains forward-looking statements that reflect our plans,
estimates and beliefs. Our actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or
contribute to these differences include those discussed below and elsewhere in
this Annual Report, including Item 1A. Risk Factors.
Overview
We offer
a broad range of clinical trial technology and services including electronic
data capture, handheld devices, and interactive voice and Web response software
which is designed to speed and improve the process of collecting data in
clinical trials performed for drug and medical device development. We provide
pharmaceutical, biotechnology, medical device companies and contract research
organizations with integrated software technology and services designed to
significantly reduce the time spent collecting clinical trials data, and
managing clinical trials performance, using an automated and easy-to-use
mechanism to collect data directly from clinical investigators and patients. We
believe that our automated data collection software enables our customers to
reduce overall clinical trial research costs, enhance data quality and reduce
the time it takes to close a study database.
Our
operations are subject to certain risks and uncertainties, including among
others, rapid technological change, increased competition from existing
competitors and new entrants, lack of operating history, and dependence upon key
members of the management team. The operating results are also affected by
general economic conditions affecting the pharmaceutical, biotechnology and
medical device industries. See Item 1A. Risk Factors.
Industry
analysts and commentators have estimated that the growth in the use of eClinical
technologies will continue to accelerate. We will have to continue to expand our
customer base and technologies in order to maintain and grow our market share.
The number of active eClinical trials being performed by us has grown from 24 in
2002 to 95 in 2008 because of the increased market penetration and adoption of
eClinical technologies by the pharmaceutical and biotechnology
industries.
Recent
Changes
On
November 12, 2008, the board of directors appointed M. Denis Connaghan as
etrials’ President and Chief Executive Officer, replacing Chuck Piccirillo,
etrials’ former Vice President of Technology, who served as interim president
and chief executive officer since July 10, 2008.
Since Mr.
Connaghan’s appointment, etrials has taken a number of steps to realign the
organization to more effectively focus on key customer segments and capture
future growth opportunities. In December 2008, etrials laid out its strategy to
resize the organization to better ensure its customers can more rapidly capture
accurate, high quality data by leveraging its extensive global experience, and
full breadth of its eClinical and integration capabilities. The new structure is
designed to drive this strategy by increasing accountability, expediting
decision-making and aligning the organization with three key
objectives:
-- Expand
customer-centric culture and capabilities -- etrials will develop rich
experiences for each client segment and deliver solutions to meet the needs of
all clinical trial operations, investigators and subjects worldwide. etrials
will organize its services around user segments, rather than around
products.
-- Lead
in next-generation eClinical platforms -- etrials will enhance its
industry-leading breadth of offerings to give the most diverse array of clinical
trials, from large pharmaceutical companies to small biotechnology companies and
specialty contract research organizations, every opportunity to take full
advantage of eClinical capabilities.
-- Drive
organizational effectiveness and scale -- etrials will resize the organization,
while recruiting and retaining the best industry talent and focus its resources
on high-impact, value-added initiatives to help capture the most significant
long-term growth opportunities.
Under the
new structure, Chuck Piccirillo, former vice president of technology, Stuart
Thiede, former vice president of service delivery and Michael Harte, former vice
president of strategic accounts each decided to leave etrials. Michael Harte has
agreed to continue his support of etrials and remain active with the Company to
ensure a smooth transition and to assist the management team with its planned
realignment and growth strategies.
etrials'
senior management team, actively led by Connaghan and with the continued
participation of Joseph (Jay) Trepanier III, etrials’ Chief Financial Officer,
and Michael Mickens, etrials' Vice President of Sales and Client services, are
working closely together to ensure the Company is aggressively moving its
strategy forward, driving long-term growth and fulfilling etrials’ core mission
to connect clinical trial sponsors with high quality data, and turning their
trials’ data into actionable information for safer, faster and less costly
clinical development.
Our goal
is to accelerate top line revenue growth as we begin to realize a return on our
strategic plans during 2009 and to position ourselves to become
profitable.
Sources
of Revenues
We derive
revenues from providing software application-hosting and related services to our
customers on clinical trial projects. We offer our eClinical solutions through
an application service provider model. We generate revenues from our
professional services and software application-hosting, which include hosting
fees and software usage fees, in three stages of drug development for each
clinical trial. The first stage (development and deployment) includes trial and
application setup, including design of electronic case report forms and edit
checks, investigator site training, and implementation of the system and server
configuration. The second stage (study conduct) consists of project management
services, application hosting and related professional and support services. The
third stage (close out) consists of services required to close out, or lock, the
database for the clinical trial and deliver final data sets to the
client.
Software usage fees and hosting fees
revenues
- We derive our software usage fees and hosting fees revenues
from our eClinical solution suite, which includes primarily our electronic data
capture, electronic patient diaries, interactive voice response and post
marketing solutions.
Services revenue
- We provide
our customers a full range of professional services in support of our eClinical
software solutions. These services are delivered during all three stages of the
clinical trial as described above.
Services
provided for all three stages are generally on a fixed fee basis according to
the budget assumptions specified in the contract. If budget assumptions change,
etrials and the client generally agree to a change in scope amendment to the
contract. We recognize revenues from services, including software subscriptions
and usage fees, and hosting fees, utilizing the proportional performance method,
measured principally by the total labor hours incurred as a percentage of
estimated total labor hours for each contract. We use this method because
management considers total labor hours incurred to be the best available measure
of progress on these contracts. The company records a loss for its contracts at
the point it is determined that the total estimated contract costs will exceed
management estimates of contract revenues. No such losses had been incurred as
of December 31, 2008.
Billing
for eClinical services will occur over the life of the contract. Although the
billing increments are negotiated in each contract individually, the total value
of the agreement is generally invoiced in the following increments:
Stage
|
|
|
% of Contract Value
|
Contract
execution
|
|
|
25%
|
System
deployment
|
|
|
25%
|
Study
conduct
|
|
|
40%
|
Project
close-out
|
|
|
10%
|
|
|
|
100%
|
Customers
generally have the ability to terminate contracts upon 30 days notice to
us. In the event that a customer cancels a clinical trial and its
related task order, all deferred revenue is recognized and certain termination
related fees may be charged.
We record
new projects into backlog when we receive written confirmations from clients
that they have decided to award us contracts or work orders for specific
projects, which means that our backlog includes projects for which we do not
have contracts or project work orders signed by customers. The amount of backlog
is the total amount of the project budget agreed upon by the client and us less
revenue previously recognized by us on each project. Customer delays
in conducting clinical trials and the ability of customers to cancel projects
without penalty means that our backlog is not a guaranty as to the amount or
timing of future revenue.
Reimbursable Out-of-pocket
Revenues
– Reimbursable out-of-pocket revenues and corresponding expenses
consist of client pass-through costs, which can fluctuate quarterly based upon
contract activity.
Cost
of Revenues and Operating Expenses
We
allocate overhead expenses such as rent, occupancy charges, certain office
administrative costs, depreciation and employee benefit costs to all departments
based on headcount. As such, general overhead expenses are reflected in the
costs of revenues, sales and marketing, research and development, and general
and administrative expense categories. We charge overhead costs that can be
specifically identifiable back to the functional area.
Costs of Revenues
- Costs of
revenues consists primarily of compensation and related fringe benefits for
project-related personnel, department management and all other dedicated project
related costs and indirect costs including facilities, information systems,
hosting facility fees, server depreciation, amortization of capitalized internal
software development costs, software license and royalty costs and other
costs. Costs can fluctuate and impact our expenses based upon
employee utilization levels associated with specific projects. We
expect these costs to increase in 2009 as we expand operational capacity to
handle anticipated future volume and engage in process reengineering efforts to
streamline our future state processes.
Sales and Marketing
- Sales
and marketing expenses consist primarily of employee-related expenses, including
travel, marketing programs (which include product marketing expenses such as
trade shows, workshops and seminars, corporate communications, other brand
building and advertising), allocated overhead and commissions. We expect that
sales and marketing expenses will increase as we expand and further penetrate
our existing customer base, expand our domestic and international selling and
marketing activities associated with existing and new product and service
offerings, and build brand awareness.
Research and Development
-
Research and development expenses consist primarily of employee-related
expenses, allocated overhead and outside contractors. We have historically
focused our research and development efforts on increasing the functionality,
performance and integration of our software products. We expect that in the
future, research and development expenses will increase as we introduce
additional integrated software solutions to our product suite and develop
automation tools to streamline use and deployment of our
technologies. We capitalize certain internal software development
costs for new software products and releases, which are incurred during the
application development stage and amortize them over the software’s estimated
useful life of one to three years. The amortization of such capitalized costs is
included in costs of revenues.
General and Administrative
-
General and administrative expenses consist primarily of employee-related
expenses, professional fees, other corporate expenses and allocated overhead. We
expect that in the future, general and administrative expenses will decrease
slightly as a percentage of revenues, as a result of an organizational focus on
driving operational efficiency, as well as the fact that we do not anticipate
the level of severance expense that was incurred during 2008.
Amortization of Intangible
Assets
- Our amortization costs of intangible assets represents the
amortization on a straight-line basis of acquired technologies over their
estimated useful lives, which is typically three years. As of March 31, 2007,
the acquired technologies were fully amortized.
Foreign
Currency Translation
The
reporting currency for the Company is the U.S. dollar. The financial
statements of the Company’s foreign subsidiary in the United Kingdom are
re-measured in accordance with SFAS No. 52,
Foreign Currency Translation
.
Re-measurement adjustments for non-functional currency monetary assets and
liabilities are included in other income (expense) in the accompanying
consolidated statements of operations.
Critical
Accounting Policies and Estimates
The discussion and analysis of our
financial condition and results of operations are based upon our consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires us to make significant estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
regularly monitor and analyze these items for changes in facts and
circumstances, and material changes in these estimates could occur in the
future. These estimates include, among others, our policies related to the
proportional performance methodology of revenue recognition of contracts and
assessing our goodwill for impairment annually. Changes in estimates are
recorded in the period in which they become known. We base our estimates on
historical experience and various other assumptions that we believe are
reasonable under the circumstances. Actual results might materially differ from
the estimates if past experience or other assumptions do not turn out to be
substantially accurate.
Our significant accounting policies are
presented within Note 2 to our consolidated financial statements included
in this Annual Report, and the following summaries should be read in conjunction
with the consolidated financial statements and the related notes included in
this Annual Report. While all accounting policies impact the financial
statements, certain policies may be viewed as critical. Critical accounting
policies are those that are both most important to the portrayal of financial
condition and results of operations and that require management’s most
subjective or complex judgments and estimates. Our management believes the
policies that fall within this category are the policies on revenue recognition,
accounting for stock-based compensation, goodwill and income taxes.
Revenue
Recognition
We derive
our revenues from providing software application-hosting and related services.
We recognize revenues resulting from application hosting services in accordance
with Emerging Issues Task Force (EITF) Issue No. 00-03,
Application of AICPA Statement of
Position 97-2 to Arrangements that include the Right to Use Software Stored on
Another Entity’s Hardware
and Securities and Exchange Commission Staff
Accounting Bulletins Nos. 101 and No. 104,
Revenue Recognition.
We
recognize revenue when all of the following conditions are satisfied:
(1) there is persuasive evidence of an arrangement; (2) the service
has been provided to the customer; (3) the collection of fees is probable;
and (4) the amount of fees to be paid by the customer is fixed or
determinable.
Overall
services provided during clinical trials are typically earned under fixed-price
contracts. Although we enter into master agreements with each customer, the
master agreements do not contain any minimum commitment by customers and contain
general terms and conditions. All services and revenues are covered
by separately negotiated addendums called task orders.
We generally recognize revenues
generated from
each project or task order using the proportional performance method, measured
principally by the total labor hours incurred as a percentage of estimated total
labor hours for each contract.
We use this
method because management considers total labor hours incurred to be the best
available measure of progress on these contracts.
We review and revise the
estimated total labor
hours of contracts periodically throughout the duration of the contracts with
adjustment to revenues from such revisions being recorded on a cumulative basis
in the period in which the revisions are made. When estimates indicate a loss,
we recognize the
loss in the current period
in its entirety. Because of the inherent uncertainties in estimating total labor
hours, it is reasonably possible that the estimates will change in the near term
and could result in a material change.
Customers
generally have the ability to terminate contracts upon 30 days written
notice. In the event that a customer cancels a clinical trial and its related
task order, deferred revenue is recognized for the work performed prior to
termination and certain termination related fees may be charged. Consequently,
termination of a contact may result in us recognizing more revenue during the
period in which the termination occurs.
Deferred
revenue represents amounts billed or cash received in advance of revenue
recognition. Included in accounts receivable are unbilled accounts receivable,
which represent revenue recognized in excess of amounts billed.
We make
provisions for estimated losses on uncompleted contracts are made on a
contract-by-contract basis and are recognized in the period in which such losses
become probable and can be reasonably estimated. To date, we have not
experienced any material losses on uncompleted contracts.
The
Company generally does not require collateral as a substantial amount of the
revenues are generated from recurring customers. Management periodically reviews
the aging of customer accounts receivable balances, the current economic
environment and its industry experience and establishes an allowance on accounts
receivable based on these reviews.
The
following summarizes the components of our revenues:
|
|
Year
Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
11,234,303
|
|
|
$
|
13,561,970
|
|
Software
and usage fees
|
|
|
2,518,609
|
|
|
|
3,155,493
|
|
Hosting
fees
|
|
|
1,307,999
|
|
|
|
1,631,798
|
|
Net
service revenues
|
|
|
15,060,911
|
|
|
|
18,349,261
|
|
Reimbursable
out-of-pocket revenues
|
|
|
1,181,409
|
|
|
|
4,090,343
|
|
Total
|
|
$
|
16,242,320
|
|
|
$
|
22,439,604
|
|
We
account for pass-through expenses in accordance with EITF Issue No. 01-14,
Income Statement
Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred
. EITF No. 01-14 requires reimbursable out-of-pocket
expenses incurred to be characterized as revenue in the statement of operations.
Pass-through revenues and expenses include diary hardware and related taxes,
wireless telecommunications, shipping, and travel expenses incurred on the
client’s behalf.
Accounting for Stock-Based
Compensation
The
Company adopted the provisions of SFAS No. 123 (Revised 2004),
Share Based Payments
(SFAS
123R) on January 1, 2006. SFAS 123R also requires the benefits of tax
deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow. The Company will
recognize excess tax benefits when those benefits reduce current income taxes
payable.
Since the
Company used the minimum-value method as a non-public company to estimate the
fair value of stock awards under SFAS 123 for pro forma footnote disclosure
purposes, the Company was required to adopt SFAS 123R using the
“prospective-transition” method, upon the effective date. Under the prospective
method, nonpublic entities that previously applied SFAS 123 using the
minimum-value method whether for financial statement recognition or pro forma
disclosure purposes will continue to account for non-vested equity awards
outstanding at the date of adoption of SFAS 123R in the same manner as they had
been accounted for prior to adoption (APB 25 intrinsic value method for the
Company). All awards granted, modified, or settled after the date of
adoption are accounted for using the measurement, recognition, and attribution
provisions of SFAS 123R. The Company has continued to recognize
compensation expense for awards issued prior to the adoption of SFAS 123R in
accordance with the provisions of APB 25. Awards granted to employees subsequent
to January 1, 2006 have been accounted for in accordance with SFAS
123R. The Company recognized non-cash stock-based compensation
expense of $ 1,358,696 and $1,443,084 for the years ended December 31, 2008 and
2007.
Goodwill
The
Company accounts for its goodwill in accordance with SFAS No. 142,
Goodwill and Other Intangible
Assets
(SFAS No. 142). SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. The Company concluded it has one reporting unit for purposes of
performing the goodwill impairment analysis. Under the non-amortization
approach, goodwill and certain intangibles are not amortized into results of
operations, but instead are reviewed for impairment at least annually and
written down and charged to operations only in the periods in which the recorded
value of goodwill exceeds its fair value.
During
the nine months ended September 30, 2008, the Company experienced a significant
decline in market capitalization. In addition, the Company
experienced a decline in revenues resulting from, among other things, customer
delays and timing of new contracts. These conditions and their effect
on the Company’s current and future financial performance and financial
condition indicated a possible impairment of the Company’s recorded goodwill
balance and required the Company to perform an interim impairment analysis to
determine whether actual impairment had occurred. Based on this
interim impairment analysis, management concluded that its goodwill balance was
impaired and therefore recorded an impairment charge of
$3,995,000. The Company’s goodwill evaluation utilized various
valuation techniques, primarily an estimation of the present value of its future
cash flows that considered the anticipated revenue and earnings effects of the
economic conditions, industry conditions, and conditions specific to the Company
described above.
As part
of its annual goodwill impairment analysis performed during the fourth quarter,
management noted that the Company had experienced a significant decline in its
market capitalization subsequent to November 2008. In addition, the
global economic recession continued to have a negative impact on the Company’s
revenues and the timing of new contracts, which impacted certain assumptions
used in the goodwill impairment analysis, including the projected cash flows,
discount rates and control premiums. Accordingly, the Company
performed an impairment analysis during the fourth quarter for the remaining
goodwill balance and concluded that additional impairment existed. As a result
of this analysis, the Company concluded that the remaining goodwill balance was
fully impaired. Accordingly, the Company recorded a total goodwill
impairment charge of $8,011,037 for the year-ended December 31,
2008.
Accounting
for Income Taxes
In
connection with preparing our financial statements, we are required to estimate
our income taxes in each of the jurisdictions in which we operate. This process
involves the assessment of our net operating loss carry-forwards and credits, as
well as estimating the actual current tax liability together with assessing
temporary differences resulting from differing treatment of items, such as
reserves and accrued liabilities, for tax and accounting purposes. We then
assess the likelihood that deferred tax assets will be recovered from future
taxable income, and to the extent we believe that recovery is not likely, we
must establish a valuation allowance. Based on historical results, we believe
that it is more likely than not that we will not realize the value of our
deferred tax assets and therefore have provided a full valuation allowance
against our net deferred tax assets as of December 31, 2008.
Results
of Operations
Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
Net
service revenues decreased 17.5% to $15.1 million for the year ended December
31, 2008, as compared to $18.3 million for the year ended December 31, 2007. The
decrease in revenues is primarily the result of the timing of new project starts
during 2008. Although the company experienced significant growth in
awards throughout the year, the customers delayed starting a substantial portion
of those studies. This, along with the fact that the company
experienced $3.9 million in cancellations throughout the year, had an
unfavorable impact on 2008 revenue. Overall cancellations
increased by 44.4% in 2008, as they went from $2.7 million in 2007 to $3.9
million in 2008. This was a direct reflection of the economic times
and the fact that customers are opting to cancel studies sooner than was the
case in the past, especially if they do not show promising results early in the
study. Despite the increase in cancellations, the company still
achieved significant year-over-year growth in total available backlog of more
than 30% . This was driven by $24.9 million in new contract awards throughout
2008. These awards led to backlog of $25.1 million at December 31,
2008 as compared to $19.2 million at the end of 2007.
Reimbursable out-of-pocket revenues and
corresponding expenses decreased to $1.2 million from $4.1 million for the year
ended December 31, 2008 and 2007, respectively. This 71% decrease was due to the
Company having significantly fewer active diary related projects in 2008 as
compared to 2007. The hardware and wireless charges associated with
the diary devices are responsible for driving the reimbursable expenses, so in
2007 the expenses were much higher. The majority of the Company’s
award commitments in 2008 were studies requiring our IVR and EDC
solutions.
Costs of
revenues increased 6.1% to $9.8 million from $9.3 million for the year ended
December 31, 2008 and 2007, respectively. This increase was the
result of several factors, including operations personnel averaging six more
headcount throughout 2008 as compared to 2007, and overall higher average salary
expense per billable employee, as well as additional process reengineering costs
incurred to drive tool automation and future year operational
efficiencies. As a percentage of net service revenues, costs of
revenues increased to 65.3% from 50.5% for the year ended December 31, 2008 and
2007, respectively.
Sales and
marketing costs remained relatively flat in 2008 at $4.7 million as compared to
$4.8 million in 2007. The slight decrease was attributable to reductions in
overall marketing spending in an effort to manage our
expenses. The year-over-year reduction in marketing spending
was partially offset by an effort to ramp up our sales force throughout the
year. As a percentage of net service revenues, sales and marketing costs
increased to 31.4% from 26.1% for the year ended December 31, 2008 and 2007,
respectively because of decreased revenue
General
and administrative costs decreased by 14.0% to $6.4 million from $7.2 million
for the year ended December 31, 2008 and 2007, respectively. This decrease was
primarily the result of legal expenses declining by nearly $591,000 in 2008 as
compared to 2007. The Company settled a patent infringement
case related to Datasci in November 2007. In doing so, the company incurred
$653,000 of legal expense during 2007 relating to our defense of this
lawsuit. Also, the Company was able to decrease its year over year
personnel expenses by more than $186,000 as a result of having three fewer
general and administrative related headcount in 2008 as compared to
2007. As a percentage of net service revenues, general and
administrative expenses increased to 42.4% from 39.5% for year ended December
31, 2008 and 2007, respectively because of decreased revenue.
Amortization
of intangible assets consists of amortization of acquired software technologies
over their estimated useful life. These costs were $15,199 for the year ended
December 31, 2007. These costs declined since certain intangible
assets were fully amortized in 2007.
Research
and development costs decreased by 5.2% to $2.1 million from $2.2 million for
the year ended December 31, 2008 and 2007, respectively. This decrease was
primarily the result of additional costs capitalized in connection with the
development of internal software from $300,000 in 2007 to $400,000 in
2008. As a percentage of net service revenues, research and
development expenses increased to 14.0% from 12.1% for the year ended December
31, 2008 and 2007, respectively because of decreased revenue.
Based on
the goodwill impairment analysis discussed above under the subheading Goodwill,
the Company determined that goodwill was impaired and recorded an impairment
charge of $8,011,037 during 2008.
Other
income for the year ended December 31, 2008 was $196,123 as compared with other
income of $780,532 for the year ended December 31, 2007. The change is primarily
the result of the decrease in interest income as a result of lower
cash balances and a decline in interest rates.
The
Company experienced a net loss of $15.8 million compared with a net loss of $6.2
million for the year ended December 31, 2008 and 2007, respectively. Of the net
loss, approximately $8.0 million is attributable to the goodwill impairment
expense described earlier. The other primary factor impacting the
increased net loss for the year was the $3.2 million decline in year- over-year
net service revenue. This decline was partially offset by lower 2008 year over
year operating expenses, not including the goodwill impairment
expense.
Liquidity
and Capital Resources
Our
principal sources of cash have been from revenues from software
application-hosting and related services as well as from proceeds from the
issuance of various debt instruments and the sale of equity
securities.
At
December 31, 2008 we had cash and cash equivalents of $10.7 million. Our cash
and cash equivalents decreased by $4.5 million during the year ended December
31, 2008, primarily due to our net loss, exclusive of non-cash expenses and net
borrowing.
Operating
activities used approximately $2.9 million and $4.9 of net cash in the years
ended December 31, 2008 and 2007, respectively. The decrease in net
cash used in operating activities was primarily the result improved cash
collection of accounts receivable, offset by an increased operating loss net of
non-cash expenses including the impairment of goodwill of $8.0
million.
In the
years ended December 31, 2008 and 2007, approximately $0.3 million and $6.0
million of net cash was provided from investing activities,
respectively. The decrease in net cash provided from investing
activities in 2008 is primarily attributable to sales of short-term investments
of $1.4 million, offset by the purchase of property and equipment of $800,000
and capitalized internal software development costs of $400,000.
In the
year ended December 31, 2008, $500,000 of net cash was used in financing
activities, as compared to $900,000 of net cash provided by financing activities
in the year ended December 31, 2007. Financing activities during 2008
included $56,000 of increased borrowing, net of payments, offset by $445,000
related to the purchase of outstanding common shares. Financing
activities during 2007 included $600,000 of increased borrowing, net of payments
and $300,000 of proceeds from stock option exercises.
We
believe our existing cash, cash equivalents, short-term investments, and cash
provided by operating activities and our debt facilities will be sufficient to
meet our working capital and capital expenditure needs over the next
twelve months. Our future capital requirements will depend on many factors,
including our rate of revenue growth, the expansion of our marketing and sales
activities, the expansion of our operating capacity, the timing and extent of
spending to support product development efforts, the timing of introductions of
new services and enhancements to existing services, and the continuing market
acceptance of our services. To the extent that existing cash and securities and
cash from operations, are insufficient to fund our future activities, including
potential acquisitions of complementary eClinical technology companies, we will
need to raise additional funds through public or private equity, and or debt
financing. Additional funds might not be available on terms favorable
to us or at all.
Contractual
Obligations
We do not
have any special purpose entities or any other off balance sheet financing
arrangements. We have operating leases for office space and office equipment and
a capital lease for the purchase of third party software, which are described
below.
We
generally do not enter into binding purchase commitments. Our principal
commitments are primarily for leases for office space and equipment and a
capital lease for the purchase of third party software. At December 31, 2008,
the future minimum payments under these commitments were as
follows:
Periods
Ending December 31,
|
|
Capital
Leases
|
|
|
Operating
Leases
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
136,232
|
|
|
$
|
561,382
|
|
2010
|
|
|
122
|
|
|
|
570,465
|
|
2011
|
|
|
-
|
|
|
|
441,751
|
|
2012
|
|
|
-
|
|
|
|
414,732
|
|
2013
and thereafter
|
|
|
-
|
|
|
|
99,646
|
|
Total
required lease payments
|
|
$
|
136,354
|
|
|
$
|
2,087,976
|
|
Less
interest included
|
|
|
(2,795
|
)
|
|
|
-
|
|
Total
minimum payments
|
|
|
133,559
|
|
|
$
|
2,087,976
|
|
Current
portion of capital lease
|
|
|
133,559
|
|
|
|
|
|
Long
term portion of capital lease
|
|
$
|
-
|
|
|
|
|
|
On
February 1, 2005, the Company entered into two loan agreements with RBC
Centura Bank. These loan agreements were modified on May 31, 2006 when a third
loan agreement was added and on May 31, 2007 when a fourth loan agreement was
added. The first agreement is a $2,500,000 revolving accounts
receivable line of credit which provides for borrowings up to 80% of current
accounts receivable balance at the prime rate of interest plus
0.25%. This line of credit has $1,384,000 outstanding as of December
31, 2008 and these borrowings are secured primarily by accounts receivable and
other corporate assets. The second agreement is a $300,000 equipment
line of credit which we repaid during the three months ended March 31,
2008. This loan funded equipment purchases and provided for interest
at the bank’s prime rate of interest plus 1.0%. The third agreement is a
$500,000 equipment loan which has $250,337 outstanding as of December 31, 2008.
Borrowings under this equipment loan are being paid over a period of 36 months
at the bank’s prime rate of interest plus 0.75%. The fourth agreement is a
$240,000 equipment line of credit which had $193,333 outstanding as of December
31, 2008. This loan funded equipment purchases and provided for interest at the
bank’s prime rate of interest plus 0.75%. Borrowings under the equipment line of
credit will be paid over a period of 39 months. The capital equipment borrowings
are secured primarily by the fixed assets that were acquired. In
addition to the loans listed above, the Company has an additional amount of
$500,000 available to borrow through the draw down period which expires
September 10, 2009. As of December 31, 2008, the Company has not
exercised this option.
Working
capital borrowings are secured primarily by our accounts receivable and other
corporate assets while capital equipment borrowings are secured by the fixed
assets that were acquired. Under the terms of these credit lines, we are
required to comply with certain financial covenants.
As a result of the goodwill impairment charge recorded
during the third quarter, the lender amended certain restrictive financial
covenants related to the outstanding debt such that the Company was in
compliance at December 31, 200
8.
To the extent
we are unable to satisfy those covenants in the future, we will need to obtain
waivers to avoid being in default of the terms of these credit lines. If an
un-waived default occurs, the bank may require that we repay all amounts then
outstanding. We expect that we will have sufficient resources to fund any
amounts which may become due under these credit lines as a result of a default
by us or otherwise. However, any amounts we are required to repay prior to a
scheduled repayment date would reduce funds that we could otherwise allocate to
other opportunities that we consider desirable.
Inflation
To date,
we believe that the effects of inflation have not had a material adverse effect
on our results of operations or financial condition.
Certain
Factors Which Might Affect Future Results
We
operate in a rapidly changing environment that involves a number of risks, some
of which are beyond our control. This discussion highlights some of the risks
which may affect future operating results. These are the risks and uncertainties
we believe are most important for you to consider. Additional risks and
uncertainties not presently known to us, which we currently deem immaterial or
which are similar to those faced by other companies in our industry or business
in general, may also impair our business operations. If any of the following
risks or uncertainties actually occurs, our business, financial condition and
operating results would likely suffer.
See “Item
1A. Risk Factors”.
Item
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Foreign Currency Exchange
Risk
- Our results of operations and cash flows are subject to
fluctuations due to changes in foreign currency exchange rates, particularly
changes in the British pound sterling. During the years ended December 31,
2008 and 2007 expenses associated with our UK subsidiary were denominated in the
British pound sterling. This creates a foreign currency exchange risk for
us.
Our UK
subsidiary has inter-company accounts that eliminate upon consolidation; such
accounts expose us to foreign currency rate movements. We record all exchange
rate fluctuations in our consolidated statements of operations under “other
income (expense).” We have implemented a risk management program
under which we measure foreign currency exchange risk monthly and manage those
exposures through the use of various internal controls. This process is designed
to minimize foreign currency translation exposures that could otherwise affect
consolidated results of operations.
Interest Rate Sensitivity
-
We currently invest cash and cash equivalents primarily in bank short-term
investment accounts or money market funds, U.S. agency notes and corporate
bonds. Amounts at times exceed federally insured limits. We maintain this cash
at high credit quality financial institutions and invest in quality investments
rated at least A2 by Moody’s Investors Service or A by Standards & Poors and
as a result believe that our risk is limited. We had unrestricted
cash, cash equivalents and short-term investments totaling approximately $10.7
million at December 31, 2008. The unrestricted cash and cash equivalents
are held for working capital purposes. We do not enter into investments for
trading or speculative purposes. Due to the short-term nature of these
investments, we believe that we do not have any material exposure to changes in
the fair value of our investment portfolio as a result of changes in interest
rates. Declines in interest rates, however, would reduce future interest
income.
We have a
working capital line of credit and bank equipment loans that bear interest based
upon the prime rate plus 0.25% and 0.75% - 1.0%, respectively. At
December 31, 2008 the prime rate was 3.25%, and there was $1,384,000 and
$443,670 outstanding under our working capital line of credit and bank equipment
loans, respectively. If the prime rate fluctuated by 10%, and based on amounts
outstanding as of December 31, 2008, interest expense for the year would
have increased by approximately $183,000.
Item 8.
FINANCIAL
STATEMENTS
AND SUPPLEMANTARY
DATA
(a)
|
The following
documents are filed as part of this report and are included in this report
immediately following the signature pages of this
report:
|
|
(1)
|
Financial
Statements
Report
of Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of December 31, 2008 and 2007
Consolidated
Statements of Operations for the years ended December 31, 2008 and
2007
Consolidated
Statements of Stockholders’ Equity for the years ended December 31,
2008 and 2007
Consolidated
Statements of Cash Flows for the years ended December 31, 2008 and
2007
Notes
to Consolidated Financial
Statements
|
Item
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
(a) Disclosure
Controls and Procedures.
The
Company has established disclosure controls and procedures to ensure that
material information relating to etrials Worldwide, Inc. is made known to the
officers who certify the Company financial reports and to other members of
senior management and the Board of Directors. Based on their evaluation, the
Company’s principal executive and principal financial officers have concluded
that disclosure controls and procedures (as defined in Rule 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934) were effective as of
December 31, 2007 to ensure that information required to be disclosed in the
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
Management’s
Annual Report on Internal Control Over Financial Reporting.
The
Company's management is responsible for establishing and maintaining adequate
control over financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.
Our
internal control over financial reporting includes those policies and procedures
that:
|
●
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
Company;
|
|
●
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being
made only in accordance with authorizations of the Company’s management
and directors; and
|
|
●
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have
a material effect on the financial
statements.
|
Under the
supervision and with the participation of the Company's management, including
our principal executive and principal financial officers, the Company conducted
an evaluation of the effectiveness of its internal control over financial
reporting based on the framework in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(the “COSO Framework”). Based on this evaluation under the COSO
Framework, the Company's management concluded that its internal control over
financial reporting was effective as of December 31, 2008.
This
annual report does not include an attestation report of the Company’s registered
public accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by the Company’s registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management’s report
in this annual report.
(b) Changes
in Internal Control over Financial Reporting.
There was
no change in the Company’s internal control over financial reporting that has
materially affected, or is reasonably likely to materially affect, the Company’s
control over financial reporting.
The
evaluation of our disclosure controls included a review of whether there were
any significant deficiencies in the design or operation of such controls and
procedures, material weaknesses in such controls and procedures, any corrective
actions taken with regard to such deficiencies and weaknesses and any fraud
involving management or other employees with a significant role in such controls
and procedures.
Our
management does not expect that our disclosure controls and procedures and our
internal control over financial reporting will prevent all errors and
fraud. A control system, no matter how well conceived and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
controls system are met. The design of any system of controls is
based in part upon assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions.
Item
9
B.
OTHER
INFORMATION
None.
Item
10.
DIRECTORS
, EXECUTIVE
OFFICERS
AND CORPORATE
GOVERNANCE
.
The
information required by Item
10
is
incorporated by reference to our definitive proxy statement relating to our 2009
annual meeting of shareholders. In accordance with Regulation 14A, we will be
filing that proxy statement no later than 120 days after the end of the last
fiscal year.
We have
adopted a Code of Ethics that applies to our principal executive officer,
principal financial officer, principal accounting officer, the Board of
Directors and other officers and employees. A copy of our Code of Ethics may be
obtained at no charge by writing to us at the following address: etrials
Worldwide, Inc., Attn: Joseph (Jay) Trepanier III, 4000 Aerial Center
Parkway, Morrisville, NC 27560.
The
information required by Item 11 is incorporated by reference to our definitive
proxy statement relating to our 2009 annual meeting of shareholders.
In accordance with Regulation 14A, we will be filing
that proxy statement no later than 120 days after the end of the last fiscal
year.
Item 12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS.
The information required by Item
12
is incorporated
by reference to our definitive prox
y
statement relating to our 2009
annual
meeting of shareholders.
In accordance with Regulation 14A, we will be
filing that proxy statement no later than 120 days after the end of the last
fiscal year covered by the financial statements included in this
Report.
Item
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS.
The
information required by Item
13
is
incorporated by reference to our definitive proxy statement relating to our 2009
annual meeting of shareholders. In accordance with Regulation 14A, we will be
filing that proxy statement no later than 120 days after the end of the last
fiscal year covered by the financial statements included in this
Report.
Item
14.
PRINCIPAL
ACCOUNTANT FEES AND SERVICES.
The
information required by Item 14 is incorporated by reference to our definitive
proxy statement relating to our 2009 annual meeting of
shareholders. In accordance with Regulation 14A, we will be filing
that proxy statement no later than 120 days after the end of the last fiscal
year covered by the financial statements included in this Report.
Item 15.
EXHIBITS
, FINANCIAL
STATEMENT SCHEDULES
The information required by this Item 15
is incorporated by reference from the Exhibit Index
that appears in this Report immediately following the financial statements
included in this Report.
In accordance with the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
etrials
Worldwide, Inc.
By:
/s/ M. Denis
Connaghan
M.
Denis Connaghan, Chief Executive Officer
March
10, 2009
|
|
|
In
accordance with the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
SIGNATURE
|
TITLE
|
DATED
|
|
|
|
/
s/ M. Denis Connaghan
M.
Denis Connaghan
|
President
and Chief Executive Officer (Principal Executive Officer) and
Director
|
March
10, 2009
|
|
|
|
/s/ Joseph (Jay) Trepanier III
Joseph
(Jay) Trepanier III
|
Chief
Financial Officer (Principal Financial and Accounting
Officer)
|
March
10, 2009
|
|
|
|
/s/ Robert Brill
Robert
Brill
|
Director
|
March
10, 2009
|
|
|
|
Peter
Collins
|
Director
|
|
|
|
|
/s/ Kenneth Jennings
Kenneth
Jennings
|
Director
|
March
10, 2009
|
|
|
|
Hans
Lindroth
|
Director
|
|
|
|
|
/s/ Don Russell
Don
Russell
|
Director
|
March
10,
2009
|
Index
to Financial Statements
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board
of Directors and Stockholders of
etrials
Worldwide, Inc.
We have
audited the accompanying consolidated balance sheets of etrials Worldwide, Inc.
as of December 31, 2008 and 2007, and the related consolidated statements of
operations, stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of etrials Worldwide,
Inc. at December 31, 2008 and 2007, and the consolidated results of its
operations and its cash flows for the years then ended, in conformity with U.S.
generally accepted accounting principles.
/s/Ernst
& Young LLP
Raleigh,
North Carolina
March 9,
2009
etrials
Worldwide, Inc.
|
|
|
|
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
10,699,537
|
|
|
$
|
13,792,508
|
|
Short-term
investments
|
|
|
-
|
|
|
|
1,448,526
|
|
Accounts
receivable, net of allowance for doubtful accounts
of
$602,598 and $156,500, respectively
|
|
|
3,782,191
|
|
|
|
5,310,648
|
|
Inventories
|
|
|
136,500
|
|
|
|
554,430
|
|
Prepaid
expenses and other current assets
|
|
|
299,353
|
|
|
|
330,082
|
|
Total
current assets
|
|
|
14,917,581
|
|
|
|
21,436,194
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
2,026,478
|
|
|
|
2,015,762
|
|
Goodwill
|
|
|
-
|
|
|
|
8,011,037
|
|
Other
assets
|
|
|
119,538
|
|
|
|
119,538
|
|
Total
assets
|
|
$
|
17,063,597
|
|
|
$
|
31,582,531
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
522,909
|
|
|
$
|
720,243
|
|
Accrued
expenses
|
|
|
2,446,552
|
|
|
|
1,747,257
|
|
Deferred
revenue
|
|
|
1,637,817
|
|
|
|
1,705,544
|
|
Bank
line of credit and other short-term borrowings
|
|
|
1,630,666
|
|
|
|
1,312,667
|
|
Current
portion of capital lease obligations
|
|
|
133,559
|
|
|
|
429,789
|
|
Total
current liabilities
|
|
|
6,371,503
|
|
|
|
5,915,500
|
|
Capital
lease obligations, net of current portion
|
|
|
-
|
|
|
|
23,956
|
|
Long-term
borrowings, net of current portion
|
|
|
197,004
|
|
|
|
250,337
|
|
Total
liabilities
|
|
|
6,568,507
|
|
|
|
6,189,793
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
Common
stock; $0.0001 par value; 50,000,000 shares authorized at
December
31, 2008 and December 31, 2007; and 10,767,520 and
12,579,701
issued and outstanding at December 31, 2008 and
December
31, 2007, respectively
|
|
|
1,077
|
|
|
|
1,258
|
|
Additional
paid-in capital
|
|
|
56,203,286
|
|
|
|
55,301,138
|
|
Deferred
compensation
|
|
|
(1,927
|
)
|
|
|
(18,927
|
)
|
Accumulated
deficit
|
|
|
(45,707,346
|
)
|
|
|
(29,890,731
|
)
|
Total
stockholders' equity
|
|
|
10,495,090
|
|
|
|
25,392,738
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
17,063,597
|
|
|
$
|
31,582,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
etrials
Worldwide, Inc.
|
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
service revenues
|
|
$
|
15,060,911
|
|
|
$
|
18,349,261
|
|
Reimbursable
out-of-pocket revenues
|
|
|
1,181,409
|
|
|
|
4,090,343
|
|
Total
revenues
|
|
|
16,242,320
|
|
|
|
22,439,604
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
Costs
of revenues
|
|
|
9,840,263
|
|
|
|
9,273,288
|
|
Reimbursable
out-of-pocket expenses
|
|
|
1,181,409
|
|
|
|
4,090,343
|
|
Sales
and marketing
|
|
|
4,735,591
|
|
|
|
4,789,936
|
|
General
and administrative
|
|
|
6,384,735
|
|
|
|
7,249,974
|
|
Research
and development
|
|
|
2,102,023
|
|
|
|
2,216,346
|
|
Impairment
of goodwill
|
|
|
8,011,037
|
|
|
|
-
|
|
Amortization
of intangible assets
|
|
|
-
|
|
|
|
15,199
|
|
Litigation
settlement
|
|
|
-
|
|
|
|
1,750,000
|
|
Total
cost and expenses
|
|
|
32,255,058
|
|
|
|
29,385,086
|
|
Operating loss
|
|
|
(16,012,738
|
)
|
|
|
(6,945,482
|
)
|
|
|
|
|
|
|
|
|
|
Other
income (expenses):
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(120,207
|
)
|
|
|
(147,872
|
)
|
Interest
income
|
|
|
349,591
|
|
|
|
944,345
|
|
Other
expense, net
|
|
|
(33,261
|
)
|
|
|
(15,941
|
)
|
Total
other income, net
|
|
|
196,123
|
|
|
|
780,532
|
|
Net
loss
|
|
$
|
(15,816,615
|
)
|
|
$
|
(6,164,950
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
$
|
(1.45
|
)
|
|
$
|
(0.57
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
10,913,536
|
|
|
|
10,805,664
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
etrials
Worldwide, Inc.
|
Consolidated
Statements of Stockholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Equity
|
|
Balance
at December 31, 2006
|
|
|
12,278,803
|
|
|
$
|
1,228
|
|
|
$
|
53,629,085
|
|
|
$
|
(108,102
|
)
|
|
$
|
(23,725,781
|
)
|
|
$
|
29,796,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation recorded in accordance with SFAS 123R
|
|
|
-
|
|
|
|
-
|
|
|
|
1,340,528
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,340,528
|
|
Amortization
of deferred stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,791
|
|
|
|
-
|
|
|
|
33,791
|
|
Reversal
of employee stock compensation expense due to terminations
|
|
|
-
|
|
|
|
-
|
|
|
|
(73,578
|
)
|
|
|
55,384
|
|
|
|
-
|
|
|
|
(18,194
|
)
|
Issuance
of restricted common stock
|
|
|
50,000
|
|
|
|
5
|
|
|
|
36,537
|
|
|
|
-
|
|
|
|
-
|
|
|
|
36,542
|
|
Issuance
of common stock to consultant
|
|
|
10,727
|
|
|
|
1
|
|
|
|
50,416
|
|
|
|
-
|
|
|
|
-
|
|
|
|
50,417
|
|
Exercise
of employee stock options
|
|
|
240,171
|
|
|
|
24
|
|
|
|
318,150
|
|
|
|
-
|
|
|
|
-
|
|
|
|
318,174
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,164,950
|
)
|
|
|
(6,164,950
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
12,579,701
|
|
|
$
|
1,258
|
|
|
$
|
55,301,138
|
|
|
$
|
(18,927
|
)
|
|
$
|
(29,890,731
|
)
|
|
$
|
25,392,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation recorded in accordance with SFAS 123R
|
|
|
-
|
|
|
|
-
|
|
|
|
1,287,465
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,287,465
|
|
Amortization
of deferred stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,000
|
|
|
|
-
|
|
|
|
17,000
|
|
Cancellation
of trigger shares
|
|
|
(1,566,250
|
)
|
|
|
(157
|
)
|
|
|
157
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance
of restricted common stock
|
|
|
247,067
|
|
|
|
25
|
|
|
|
54,209
|
|
|
|
-
|
|
|
|
-
|
|
|
|
54,234
|
|
Cancellation
of restricted shares
|
|
|
(131,250
|
)
|
|
|
(13
|
)
|
|
|
13
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercise
of employee stock options
|
|
|
2,756
|
|
|
|
-
|
|
|
|
5,319
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,319
|
|
Purchase
of outstanding common stock
|
|
|
(364,504
|
)
|
|
|
(36
|
)
|
|
|
(445,015
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(445,051
|
)
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(15,816,615
|
)
|
|
|
(15,816,615
|
)
|
Balance
at December 31, 2008
|
|
|
10,767,520
|
|
|
$
|
1,077
|
|
|
$
|
56,203,286
|
|
|
$
|
(1,927
|
)
|
|
$
|
(45,707,346
|
)
|
|
$
|
10,495,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
etrials
Worldwide, Inc.
|
Consolidated
Statements of
Cash
Flows
|
|
|
|
|
|
|
|
|
|
Years
Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
Operating
activities
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(15,816,615
|
)
|
|
$
|
(6,164,950
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net loss to net cash used in
operating
activities:
|
|
|
|
|
|
|
|
|
Impairment
of goodwill
|
|
|
8,011,037
|
|
|
|
-
|
|
Inventory
writedown to lower of cost or market
|
|
|
246,453
|
|
|
|
-
|
|
Depreciation
and amortization
|
|
|
1,152,302
|
|
|
|
1,222,832
|
|
Accretion
of discount on investments held-to-maturity
|
|
|
-
|
|
|
|
(4,743
|
)
|
Non-cash
stock-based compensation expense
|
|
|
1,358,699
|
|
|
|
1,443,084
|
|
Provision
for allowance for doubtful accounts
|
|
|
446,098
|
|
|
|
(134,500
|
)
|
Loss
on disposal of assets
|
|
|
-
|
|
|
|
2,281
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,082,359
|
|
|
|
(195,798
|
)
|
Prepaid
expenses and other assets
|
|
|
30,729
|
|
|
|
76,187
|
|
Inventories
|
|
|
171,477
|
|
|
|
(554,430
|
)
|
Accounts
payable and accrued expenses
|
|
|
501,961
|
|
|
|
(313,197
|
)
|
Deferred
revenue
|
|
|
(67,727
|
)
|
|
|
(307,989
|
)
|
Net
cash used in operating activities
|
|
|
(2,883,227
|
)
|
|
|
(4,931,223
|
)
|
|
|
|
|
|
|
|
|
|
Investing
activities
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(785,681
|
)
|
|
|
(461,111
|
)
|
Capitalized
internal software development costs
|
|
|
(377,337
|
)
|
|
|
(265,486
|
)
|
Maturities
of short-term investments
|
|
|
1,448,526
|
|
|
|
12,441,474
|
|
Purchases
of short-term investments
|
|
|
-
|
|
|
|
(5,724,964
|
)
|
Net
cash provided by investing activities
|
|
|
285,508
|
|
|
|
5,989,913
|
|
|
|
|
|
|
|
|
|
|
Financing
activities
|
|
|
|
|
|
|
|
|
Purchase
of outstanding common stock
|
|
|
(445,051
|
)
|
|
|
-
|
|
Net
proceeds from bank line of credit
|
|
|
258,000
|
|
|
|
600,000
|
|
Proceeds
from bank equipment loan
|
|
|
240,000
|
|
|
|
500,000
|
|
Payments
on bank equipment loan
|
|
|
(233,334
|
)
|
|
|
(202,996
|
)
|
Principal
payments on capital leases
|
|
|
(320,186
|
)
|
|
|
(310,027
|
)
|
Proceeds
from issuance of stock options and warrants
|
|
|
5,319
|
|
|
|
318,174
|
|
Net
cash (used in) provided by financing activities
|
|
|
(495,252
|
)
|
|
|
905,151
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(3,092,971
|
)
|
|
|
1,963,841
|
|
Cash
and cash equivalents at beginning of year
|
|
|
13,792,508
|
|
|
|
11,828,667
|
|
Cash
and cash equivalents at end of year
|
|
$
|
10,699,537
|
|
|
$
|
13,792,508
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
127,407
|
|
|
$
|
136,038
|
|
Non-cash
information:
|
|
|
|
|
|
|
|
|
Purchase
of inventory under capital leases
|
|
$
|
-
|
|
|
$
|
642,130
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
|
etrials
Worldwide, Inc.
Notes
to Consolidated Financial Statements
1.
Organization and Capitalization
etrials
Worldwide, Inc.
etrials
Worldwide, Inc. (“etrials” or the “Company”) is a leading eClinical solutions
provider of a suite of software applications, hosting and professional services
to pharmaceutical, biotechnology, medical device, and contract research
organizations. The Company’s end-to-end, Web-based eClinical applications work
together to coordinate data capture, logistics, patient interaction and trial
management through an integrated and comprehensive suite of products, services
and hosted solutions.
The
Company’s flexible eClinical offerings address the costly and time-consuming
clinical trial process of drug development through easy-to-use, adaptable
applications that enable more real-time visibility into the state and progress
of the clinical trial process. This results in earlier and more dynamic
decision-making and ultimately lower cost and shorter
time-to-market.
The
Company’s operations are subject to certain risks and uncertainties, including
among others, rapid technological change, increased competition from existing
competitors and new entrants, lack of operating history, and dependence upon key
members of the management team. The operating results are also affected by
general economic conditions impacting the pharmaceutical industry.
Merger
and Accounting Treatment
CEA
Acquisition Corporation (“CEA”) was incorporated in Delaware on October 14, 2003
as a blank check company, the objective of which was to effect a merger, capital
stock exchange, asset acquisition or other similar business combination in the
entertainment, media and communications industry. On February 19,
2004, CEA consummated an Initial Public Offering (the “Offering”) and raised net
proceeds of $21,390,100. Of the net proceeds from the Offering,
$20,527,250 was placed in trust and invested in government
securities. The remaining proceeds were available for business,
legal, and accounting due diligence on prospective acquisitions and continuing
general and administration expenses.
In
connection with the offering, CEA issued to representatives of its underwriter
options to purchase 350,000 units at an exercise price of $9.90 per
unit. Each unit consists of one share of common stock and two
warrants to purchase one common share each at an exercise price of $6.40 per
share. The unit purchase options expired on February 11,
2009.
On
February 9, 2006 etrials Acquisition, Inc., a Delaware corporation and wholly
owned subsidiary of CEA, consummated a merger with etrials Worldwide, Inc., in
which etrials Worldwide, Inc. changed its name back to etrials, Inc. and became
CEA’s wholly owned subsidiary. At that time CEA changed its name to
etrials Worldwide, Inc.
The
merger was accounted for under the purchase method of accounting as a reverse
acquisition in accordance with U.S. generally accepted accounting principles for
accounting and financial reporting purposes. Under this method of accounting,
CEA was treated as the “acquired” company for financial reporting
purposes. In accordance with guidance applicable to these
circumstances, this merger was considered to be a capital transaction in
substance. Accordingly, for accounting purposes, the merger was treated as the
equivalent of etrials issuing stock for the net monetary assets of CEA,
accompanied by a recapitalization. All historical share and per share
amounts have been retroactively adjusted to give effect to the reverse
acquisition of CEA and related recapitalization.
The
shares of common stock held by etrials stockholders were converted into a total
of 7,446,360 shares of CEA’s common stock, or approximately 60.3% of the
subsequently outstanding common stock of the combined company. In
connection with the merger, etrials’ stockholders also received warrants to
purchase 4,250,000 shares of CEA common stock with an exercise price of $5.00
per share. The warrants issued in the merger were immediately
tradable.
Upon
consummation of the merger, $21.4 million was released from trust to be used by
the combined company. After payments totaling approximately $900,000
for professional fees and other costs related to the merger, the net proceeds
amounted to $20.5 million. The total direct and incremental costs
incurred by the Company in connection with the merger was reflected as a
reduction to additional paid-in capital as of the effective date of the
merger.
Shares
Held in Escrow
A total
of 1,400,000 shares of common stock of the Company issued to etrials
stockholders in the merger with CEA and 166,250 shares of common stock of former
CEA shareholders (including all CEA officers and directors) were placed in
escrow (“Trigger Shares”) not released unless and until, prior to February 19,
2008, over a 20 consecutive trading day period (i) the volume weighted average
price of etrials common stock was $7.00 or more, and (ii) the average daily
trading volume was at least 25,000 shares. The Trigger Shares were
cancelled because these conditions were not met by February 19,
2008.
2.
Summary of Significant Accounting Policies
Principles
of Consolidation
The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, etrials, Inc. and etrials Worldwide
LTD. All significant inter-company accounts and transactions have
been eliminated in consolidation.
Reclassifications
Certain prior year balances have been
reclassified to conform to the presentation of the current year. Such
reclassifications had no effect on previously reported net loss or stockholders’
equity.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results will differ from those estimates and may differ
materially.
Revenue
Recognition
The
Company derives its revenues from providing software application-hosting which
includes: services, software and usage fees, hosting fees, and other fees.
Revenues resulting from software application-hosting are recognized in
accordance with Emerging Issues Task Force (EITF) Issue No. 00-03,
Application of AICPA Statement of
Position 97-2 to Arrangements that include the Right to Use Software Stored on
Another Entity’s Hardware
, Securities and Exchange Commission’s (SEC)
Staff Accounting Bulletin (SAB) Nos. 101 and No. 104,
Revenue Recognition.
The
Company recognizes revenue when all of the following conditions are satisfied:
(1) there is persuasive evidence of an arrangement; (2) the service
has been provided to the customer; (3) the collection of fees is probable;
and (4) the amount of fees to be paid by the customer is fixed or
determinable.
The
Company derives revenues from providing software application-hosting and related
services to customers on clinical trial projects. The Company offers its
eClinical solutions through an application service provider model. Revenues
resulting from our professional services and software application-hosting, which
include hosting fees and software usage fees, are generated in three stages of
drug development for each clinical trial. The first stage (development and
deployment) includes trial and application setup, including design of electronic
case report forms and edit checks, investigator site training, and
implementation of the system and server configuration. The second stage
(study conduct) consists of project management services, application hosting and
related professional and support services. The third stage (close out) consists
of services required to close out, or lock, the database for the clinical
trial and deliver final data sets to the client.
Services
provided during the three phases of clinical trials are typically earned under
fixed-price contracts. Although etrials enters into master agreements with each
customer, these master agreements do not contain any minimum revenue commitment
by customers and contain general terms and conditions. All services
and revenues are covered by separately negotiated addendums called task
orders. Revenues generated from each task order, including; services,
software subscription and usage fees, and hosting fees are generally recognized
using the proportional performance method, measured principally by the total
labor hours incurred as a percentage of estimated total labor hours for each
contract. This method is used because management considers total labor hours
incurred to be the best available measure of progress on these
contracts.
The
estimated total labor hours of contracts are reviewed and revised periodically
throughout the duration of the contracts with adjustment to revenues from such
revisions being recorded on a cumulative basis in the period in which the
revisions are made. When estimates indicate a loss, such loss is recognized in
the current period in its entirety. Because of the inherent uncertainties in
estimating total labor hours, it is reasonably possible that the estimates will
change in the near term and could result in a material change. The Company
records a loss for its contracts at the point it is determined that the total
estimated contract costs will exceed management’s estimates of contract
revenues. As of December 31, 2008, the Company has not experienced any material
losses on uncompleted contracts.
Customers
generally have the ability to terminate contracts upon 30 days notice to
the Company. However, these contracts typically require payment to etrials for
fees earned from all services provided through the termination date. In the
event that a customer cancels a clinical trial and its related task order, all
deferred revenue is recognized and certain termination related fees may be
charged.
Provisions
for estimated losses on uncompleted contracts are made on a contract-by-contract
basis and are recognized in the period in which such losses become probable and
can be reasonably estimated. As of December 31, 2008, the Company has not
experienced any material losses on uncompleted contracts.
The
following summarizes the components of the revenues recognized for the years
ended December 31, 2008 and 2007:
|
|
Year
Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Services
|
|
$
|
11,234,303
|
|
|
$
|
13,561,970
|
|
Software
and usage fees
|
|
|
2,518,609
|
|
|
|
3,155,493
|
|
Hosting
fees
|
|
|
1,307,999
|
|
|
|
1,631,798
|
|
Net
service revenues
|
|
|
15,060,911
|
|
|
|
18,349,261
|
|
Reimbursable
out-of-pocket revenues
|
|
|
1,181,409
|
|
|
|
4,090,343
|
|
Total
|
|
$
|
16,242,320
|
|
|
$
|
22,439,604
|
|
|
|
|
|
|
|
|
|
|
The
Company accounts for pass-through expenses in accordance with EITF Issue
No. 01-14,
Income
Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses
Incurred
(EITF No. 01-14). EITF No. 01-14 requires reimbursable
out-of-pocket expenses incurred to be characterized as revenues in the statement
of operations. Pass-through revenues and expenses include diary hardware and
related taxes, wireless telecommunications, shipping, and travel expenses
incurred on the client’s behalf.
Costs of
revenues consist of compensation and related fringe benefits for project-related
associates, unreimbursed project related costs and indirect costs including
facilities, information systems, and other costs. Selling, general, and
administrative costs are charged to expense as incurred.
Unbilled
services are recorded for revenue recognized to date that has not yet been
billed to the customers. In general, amounts become billable upon the
achievement of milestones or in accordance with predetermined payment schedules.
Deferred revenue represents amounts billed or cash received in advance of
revenue recognition.
Internal
Use Software and Website Development Costs
The
Company applies the guidance of EITF Issue No. 00-2,
Accounting for Web Site Development
Costs,
which sets forth the accounting for website development costs
based on the website development activity. The Company applies the guidance set
forth in SOP No. 98-1,
Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use
(SOP No. 98-1), in
accounting for the development of internal use software. SOP No. 98-1
requires companies to capitalize qualifying computer software costs, which are
incurred during the application development stage and amortize them over the
software’s estimated useful life of one to five years. The Company has
capitalized $377,337and $265,486 of internal software development costs during
the years ended December 31, 2008 and 2007, respectively.
Warranties
and Indemnification
The
Company’s hosting service is typically warranted to perform in a manner
consistent with general industry standards that are reasonably applicable and
substantially in accordance with the Company’s online help documentation under
normal use and circumstances. The Company’s arrangements also include certain
provisions for indemnifying customers against liabilities if its products or
services infringe a third party’s intellectual property rights. The Company has
not previously incurred costs to settle claims or pay awards under these
indemnification obligations. The Company accounts for these indemnity
obligations in accordance with Statement of Financial Accounting Standard (SFAS)
No. 5,
Accounting for
Contingencies,
and records a liability for these obligations when a loss
is probable and reasonably estimable. The Company has not recorded any
liabilities for these agreements as of December 31, 2008.
The
Company has entered into service level agreements with its hosted application
customers warranting certain levels of uptime reliability and permitting those
customers to receive credits against monthly hosting fees or terminate their
agreements in the event that the Company fails to meet those levels. As of
December 31, 2008, the Company has not incurred any material costs as a result
of such indemnifications and has not accrued any liabilities related to such
obligations in the accompanying consolidated financial statements.
Concentration
of Credit Risk
The
following table summarizes the number of customers who individually comprise
greater than 10% of consolidated revenues and consolidated accounts
receivable.
|
|
Number
of
Customers
|
|
|
Percent
of Consolidated
Revenue
|
|
|
Number
of
Customers
|
|
|
Percent
of Consolidated Accounts
Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2
|
|
|
|
28
|
%
|
|
|
1
|
|
|
|
21
|
%
|
2007
|
|
|
2
|
|
|
|
29
|
%
|
|
|
3
|
|
|
|
52
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company’s principal financial instruments subject to credit risk are cash and
cash equivalents, short-term investments, and accounts receivable, which are
unsecured. The Company maintains cash balances at financial institutions that
may at times exceed federally insured limits. The Company maintains this cash at
high credit quality institutions and, as a result, believes credit risk related
to its cash is minimal. The Company generally does not require collateral as a
substantial amount of the revenues are generated from recurring customers.
Management performs periodic reviews of the aging of customer balances, the
current economic environment and its industry experience and establishes an
allowance on accounts receivable based on these reviews.
The
Company serves all of its application-hosting customers from third-party web
hosting facilities located in North Carolina and Kentucky. The Company does not
control the operation of these facilities, and they are vulnerable to damage or
interruption. The Company maintains redundant systems that can be used to
provide service in the event the third-party web hosting facilities becomes
unavailable, although in such circumstances, the Company’s service might be
interrupted during the transition.
Cash,
Cash Equivalents and Short-term Investments
The
Company accounts for its short-term investments in accordance with SFAS No. 115,
Accounting for Certain
Investments in Debt and Equity Securities
. The Company
considers all highly liquid investments with original or remaining maturities of
90 days or less at the time of purchase to be cash equivalents and investments
with original or remaining maturities of between 91 days and one year to be
short-term investments. In order to manage exposure to credit risk, the Company
invests in high quality investments rated at least A2 by Moody’s Investors
Service or A by Standard & Poors.
Inventory
Inventory
consists of electronic patient diaries purchased for future clinical
trials. Inventory is valued at the lower of cost or market value and
is allocated on an average cost method. During the three months ended
September 30, 2008, the Company wrote down its inventory by approximately
$246,000 to its estimated market value. This charge has been recorded
within costs of revenues in the accompanying statement of
operations.
Property
and Equipment
Property
and equipment is recorded at cost. Computer hardware, software and equipment and
furniture and fixtures are depreciated on a straight-line basis over the
estimated useful lives of the assets and leasehold improvements are amortized
over the lease term, as follows:
|
|
|
Asset
|
|
Years
|
Leasehold
improvements
|
|
Shorter
of useful life or lease term
|
Computer
hardware, software and equipment
|
|
3
to 5
|
Capitalized
internal software development costs
|
|
1
to 5
|
Furniture
and fixtures
|
|
5
to 7
|
Long-Lived
Assets
In
accordance with SFAS No. 144,
Accounting for the Impairment or
Disposal of Long-Lived Assets
, the Company reviews its long-lived assets
including property and equipment and its developed technology, whenever events
or changes in circumstances indicate that the carrying amount of the assets may
not be fully recoverable. To determine the recoverability of its long-lived
assets, the Company evaluates the probability that future estimated undiscounted
net cash flows will be less than the carrying amount of the assets. If such
estimated cash flows are less than the carrying amount of the long-lived assets,
then such assets are written down to their fair value. The Company’s estimates
of anticipated cash flows and the remaining estimated useful lives of long-lived
assets could be reduced in the future, resulting in a reduction to the carrying
amount of long-lived assets.
Goodwill
The
Company accounts for its goodwill in accordance with SFAS No. 142,
Goodwill and Other Intangible
Assets
(SFAS No. 142). SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. The Company concluded it has one reporting unit for purposes of
performing the goodwill impairment analysis. Under the non-amortization
approach, goodwill and certain intangibles are not amortized into results of
operations, but instead are reviewed for impairment at least annually and
written down and charged to operations only in the periods in which the recorded
value of goodwill exceeds its fair value.
During
the nine months ended September 30, 2008, the Company experienced a significant
decline in market capitalization. In addition, the Company
experienced a decline in revenues resulting from, among other things, customer
delays and timing of new contracts. These conditions and their effect
on the Company’s current and future financial performance and financial
condition indicated a possible impairment of the Company’s recorded goodwill
balance and required the Company to perform an interim impairment analysis to
determine whether actual impairment had occurred. Based on this
interim impairment analysis, management concluded that its goodwill balance was
impaired and therefore recorded an impairment charge of
$3,995,000. The Company’s goodwill evaluation utilized various
valuation techniques, primarily an estimation of the present value of its future
cash flows that considered the anticipated revenue and earnings effects of the
economic conditions, industry conditions, and conditions specific to the Company
described above.
As part
of its annual goodwill impairment analysis performed during the fourth quarter,
management noted that the Company had experienced additional significant decline
in its market capitalization subsequent to November 2008. In
addition, the global economic recession continued to have a negative impact on
the Company’s revenues and the timing of new contracts, which impacted certain
assumptions used in the goodwill impairment analysis, including the projected
cash flows, discount rates, and control premiums. Accordingly, the
Company performed an impairment analysis during the fourth quarter for the
remaining goodwill balance and concluded that additional impairment existed. As
a result of this analysis, the Company concluded that the remaining goodwill
balance was fully impaired. Accordingly, the Company recorded a total
goodwill impairment charge of $8,011,037 for the year-ended December 31,
2008.
Stock-Based
Compensation
In
December 2004, the FASB issued SFAS No. 123 (revised 2004)
Share Based Payment
(SFAS
123R). SFAS 123R replaces SFAS No. 123
Accounting for Stock-Based
Compensation
(SFAS 123) and supersedes Accounting Principles Board
Opinion No. 25
, Accounting for
Stock Issued to Employees
(APB 25). SFAS 123R requires that the cost
resulting from all share-based payment transactions be recognized in the
financial statements using the fair value method. The provisions of
SFAS 123R are effective for public entities that do not file as small business
issuers as of the beginning of the first interim or annual reporting period that
begins after June 15, 2005 (January 1, 2006 for the Company). SFAS
123R requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow, rather than as an
operating cash flow. The Company will recognize excess tax benefits
when those benefits reduce current income taxes payable. The Company
recognizes compensation cost for awards with pro rata vesting using the straight
line prorated method.
The Company used the minimum-value
method as a non-public company to estimate the fair value of stock awards under
SFAS 123 for pro forma footnote disclosure purposes, the Company was required to
adopt SFAS 123R using the “prospective-transition” method upon the effective
date. Under the prospective transition method, nonpublic entities
that previously applied SFAS 123 using the minimum-value method for financial
statement recognition or pro forma disclosure purposes will continue to account
for non-vested equity awards outstanding at the date of adoption of SFAS 123R in
the same manner as they had been accounted for prior to adoption (APB 25
intrinsic value method for the Company). All awards granted,
modified, or settled after the date of adoption have been accounted for using
the measurement, recognition, and attribution provisions of SFAS
123R. The Company has continued to recognize compensation expense for
awards issued prior to the adoption of SFAS 123R in accordance with the
provisions of APB 25.
The Company maintains an Equity
Compensation Plan (the “Plan”) to provide incentives to eligible employees,
officers, directors and consultants in the form of non-qualified stock options
and, as permissible, incentive stock options. The Company has reserved a total
of 3,500,000 shares of common stock for issuance under the Plan. Of this amount,
1,341,698 shares are available for future stock option grants as of
December 31, 2008.
The Board
of Directors has the authority to administer the Plan and determine, among other
things, the interpretation of any provisions of the Plan, the number of options
that an individual may be granted, vesting schedules and option exercise prices.
With few exceptions, stock options granted under the Plan have vesting periods
of three to five years, have a contractual life not to exceed ten years, and
have exercise prices equal to the estimated fair market value of the Company’s
common stock on the grant date.
Advertising
Expense
The cost
of advertising is expensed as incurred. Advertising expense, including trade
show expenses, amounted to approximately $243,000 and $667,000 for the years
ended December 31, 2008 and 2007, respectively.
Income
Taxes
etrials
Worldwide, Inc. and its subsidiaries are subject to U.S. federal income tax, UK
income tax and income tax in multiple state jurisdictions. The
Company's 2005 through 2007 U.S. federal income tax returns remain open for
examination by the Internal Revenue Service. UK income tax returns
remain open for examination by the UK HM Revenue & Customs for the 2006
& 2007 tax years. State income tax returns for the years 2003 through 2006
remain open to examination by state taxing authorities. There
are currently no income tax examinations in process.
In July
2006, the Financial Accounting Standards Board issued interpretation No. 48,
Accounting for Uncertainty in
Income Taxes- an interpretation of FASB Statement No. 109
(“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109,
Accounting
for Income Taxes
(“SFAS 109”). This Interpretation prescribes
a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken on a
tax return. The Interpretation also provides guidance on
de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for public
companies for fiscal years beginning after December 15, 2006. The
Company adopted the provisions of FIN 48 on January 1, 2007. As of
December 31, 2008, management has evaluated the Company’s tax positions and has
not identified any unrecognized tax benefits. Therefore, no liability
has been recorded as a result of the implementation of FIN 48.
Foreign
Currency Translation
The
financial Statements of the Company’s foreign subsidiary in the United Kingdom
are remeasured in accordance with SFAS No. 52,
Foreign Currency Translation
.
The Company determined that the functional currency of its United Kingdom
operations is the U.S. dollar. Assets and liabilities denominated in
foreign currencies are remeasured into U.S. dollars at current exchange
rates. Operating results are remeasured into U.S. dollars using the
average rates of exchange prevailing during the period. Remeasurement
adjustments for non-functional currency monetary assets and liabilities are
included in other expense, net in the accompanying consolidated statements of
operations.
Segment
Reporting
SFAS
No. 131,
Disclosures
about Segments of an Enterprise and Related Information
(SFAS
No. 131), establishes standards for the way public business enterprises
report about operating segments in annual financial statements and requires
selected information of those segments to be presented in interim financial
reports issued to stockholders. SFAS No. 131 also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Operating segments are identified as components of an enterprise
about which separate discrete financial information is available for evaluation
by the chief operating decision-maker, or decision-making group, in making
decisions on how to allocate resources and assess performance. The
Company concluded it has one operating segment for purposes of
applying the guidance set forth in SFAS 131.
Loss
Per Common Share
Basic and
diluted loss per common share was determined by dividing net loss by the
weighted average common shares outstanding during the period in accordance with
SFAS No. 128,
Earnings
Per Share
(SFAS 128). Diluted net income per share includes the effects
of all dilutive, potentially issuable common shares.
The
following common share equivalents have been excluded from the computation of
diluted weighted average shares outstanding as the effect would have been
anti-dilutive:
|
|
Year
Ended December 31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Unvested
restricted common stock
|
|
|
-
|
|
|
|
43,750
|
|
Unit
purchase options
|
|
|
350,000
|
|
|
|
1,050,000
|
|
Stock
options outstanding
|
|
|
1,848,504
|
|
|
|
2,754,703
|
|
Warrants
outstanding
|
|
|
-
|
|
|
|
12,350,000
|
|
|
|
|
|
|
|
|
|
|
In addition, the 1,566,250 shares of
common stock held in escrow as of December 31, 2007 in connection with the
reverse acquisition of CEA have been excluded from the computation of basic and
diluted loss per share in accordance with SFAS 128. These shares were cancelled
on February 19, 2008.
New
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “
Fair Value Measurements”
(SFAS 157), which defines fair value, establishes a framework for
measuring fair value under generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS No. 157 applies to other
accounting pronouncements that require or permit fair value measurements. The
new guidance is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and for interim periods within those
fiscal years. The adoption of SFAS No. 157 did not have a material impact
on the Company’s consolidated financial position and results of
operations.
In
February 2007, the FASB issued Statement No. 159, “
The Fair Value Option for Financial
Assets and Financial Liabilities”
(SFAS 159). SFAS 159 permits entities
to choose to measure many financial assets and financial liabilities at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings. SFAS 159 is effective for fiscal years
beginning after November 15, 2007. The Company did not choose to measure
any financial assets or liabilities at fair value pursuant to SFAS
159.
In
December 2007, the FASB issued FASB Statements No. 141 (revised 2007),
“Business Combinations”
(SFAS 141R) and No. 160,
“Noncontrolling Interests in
Consolidated Financial Statements”
(SFAS 160). Effective for fiscal years
beginning after December 15, 2008, the standards will improve, simplify,
and converge internationally the accounting for business combinations and the
reporting of noncontrolling interests in consolidated financial statements. SFAS
141R requires the acquiring entity in a business combination to recognize all
the assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination. SFAS 160 provides
guidance for accounting and reporting of noncontrolling interests in
consolidated financial statements. The Company is currently assessing the impact
of SFAS 141R and SFAS 160 on its consolidated financial statements and future
operations.
In March
2008, the FASB issued SFAS No. 161, “
Disclosures about Derivative
Instruments and Hedging Activities”
(SFAS No. 161), an amendment of
FASB Statement No. 133. SFAS No. 161 requires enhanced disclosures
about an entity’s derivative and hedging activities and thereby improves the
transparency of financial reporting. This Statement is effective for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This Statement
encourages, but does not require, comparative disclosures for earlier periods at
initial adoption. The Company believes that the adoption of SFAS No. 161
will not have a material effect on its financial position or results of
operations.
In May
2008, the FASB issued SFAS No. 162, “
The Hierarchy of Generally Accepted
Accounting
Principles
” (SFAS 162) which
provides a framework for selecting accounting principals to be used in preparing
financial statements that are presented in conformity with U.S. generally
accepted accounting principals for nongovernmental entities. The
Company does not expect the adoption of SFAS 162 to have any impact on the
Company’s consolidated financial statements. SFAS 162 will be
effective 60 days following the SEC’s approval of the Public Company Accounting
Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles.
3.
Cash, Cash Equivalents and Short-term Investments
Cash,
cash equivalents and short-term investments consist of the
following:
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,134,164
|
|
|
$
|
371,582
|
|
Certificates
of deposit
|
|
|
1,000,000
|
|
|
|
-
|
|
Money
market
|
|
|
3,570,987
|
|
|
|
10,534,730
|
|
U.S.
agency notes
|
|
|
2,358,845
|
|
|
|
689,598
|
|
Corporate
bonds
|
|
|
2,635,541
|
|
|
|
2,196,599
|
|
Total
cash and cash equivalents
|
|
$
|
10,699,537
|
|
|
$
|
13,792,508
|
|
|
|
|
|
|
|
|
|
|
U.S.
agency notes
|
|
$
|
-
|
|
|
$
|
399,407
|
|
Corporate
bonds
|
|
|
-
|
|
|
|
1,049,119
|
|
Total
short-term investments
|
|
$
|
-
|
|
|
$
|
1,448,526
|
|
|
|
|
|
|
|
|
|
|
4.
Accounts Receivable
Accounts
receivable consists of the following:
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Billed
accounts receivable
|
|
$
|
2,540,934
|
|
|
$
|
3,344,477
|
|
Unbilled
accounts receivable
|
|
|
1,843,855
|
|
|
|
2,122,671
|
|
Total
accounts receivable
|
|
|
4,384,789
|
|
|
|
5,467,148
|
|
Allowance
for doubtful accounts
|
|
|
(602,598
|
)
|
|
|
(156,500
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,782,191
|
|
|
$
|
5,310,648
|
|
|
|
|
|
|
|
|
|
|
The
allowance for doubtful accounts consists of the following:
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Reserve
at beginning of year
|
|
$
|
156,500
|
|
|
$
|
22,000
|
|
Additions
charged to expense
|
|
|
446,098
|
|
|
|
134,500
|
|
Deductions
from reserve
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Reserve
at end of year
|
|
$
|
602,598
|
|
|
$
|
156,500
|
|
|
|
|
|
|
|
|
|
|
5.
Property and Equipment
Property
and equipment consists of the following:
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Leasehold
improvements
|
|
$
|
133,295
|
|
|
$
|
90,643
|
|
Computer
hardware, software and equipment
|
|
|
5,285,399
|
|
|
|
4,542,370
|
|
Capitalized
internal software development costs
|
|
|
1,358,539
|
|
|
|
981,202
|
|
Furniture
and fixtures
|
|
|
448,098
|
|
|
|
448,098
|
|
Total
property and equipment
|
|
|
7,225,331
|
|
|
|
6,062,312
|
|
Accumulated
depreciation and amortization
|
|
|
(5,198,853
|
)
|
|
|
(4,046,551
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,026,478
|
|
|
$
|
2,015,762
|
|
|
|
|
|
|
|
|
|
|
The
Company recorded depreciation expense for property and equipment of
approximately $1,152,000 and $1,207,000 for the years ended December 31,
2008 and 2007, respectively.
6.
Accrued Expenses
Accrued
expenses consist of the following:
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Accrued
severance
|
|
$
|
622,587
|
|
|
$
|
135,835
|
|
Accrued
other expenses
|
|
|
550,368
|
|
|
|
279,605
|
|
Accrued
client reimbursable expenses
|
|
|
290,559
|
|
|
|
451,614
|
|
Accrued
bonus
|
|
|
278,582
|
|
|
|
-
|
|
Accrued
vacation
|
|
|
235,094
|
|
|
|
282,663
|
|
Accrued
rent
|
|
|
220,829
|
|
|
|
248,815
|
|
Accrued
professional fees
|
|
|
146,203
|
|
|
|
171,941
|
|
Accrued
compensation
|
|
|
102,330
|
|
|
|
176,784
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,446,552
|
|
|
$
|
1,747,257
|
|
|
|
|
|
|
|
|
|
|
7.
Income Taxes
The
Company has no current provision for income taxes. Due to the history
of losses by the Company, management has determined that a valuation allowance
is needed to reduce the net deferred tax assets to zero. Components
of the Company’s deferred tax assets and liabilities are as follows at December
31, 2008 and 2007:
|
|
2008
|
|
|
2007
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss carryforward
|
|
$
|
14,020,000
|
|
|
$
|
11,468,000
|
|
Foreign
net operating loss carryforward
|
|
|
567,000
|
|
|
|
705,000
|
|
Research
and development tax credits
|
|
|
77,000
|
|
|
|
77,000
|
|
Inventory
|
|
|
97,000
|
|
|
|
-
|
|
Developed
technology
|
|
|
777,000
|
|
|
|
890,000
|
|
Deferred
compensation
|
|
|
945,000
|
|
|
|
765,000
|
|
Amortization
|
|
|
270,000
|
|
|
|
293,000
|
|
Accrued
expenses
|
|
|
116,000
|
|
|
|
117,000
|
|
Reserve
for doubtful accounts
|
|
|
175,000
|
|
|
|
60,000
|
|
|
|
|
17,044,000
|
|
|
|
14,375,000
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Fixed
Assets
|
|
|
153,000
|
|
|
|
64,000
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets and liabilities
|
|
|
16,891,000
|
|
|
|
14,311,000
|
|
Valuation
allowance
|
|
|
(16,891,000
|
)
|
|
|
(14,311,000
|
)
|
Net
deferred tax assets and liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
The
reasons for differences between the actual income tax benefit and the amount
computed by applying the statutory federal income tax rate to losses before
income tax benefit are as follows for the years ended December 31, 2008 and
2007:
|
|
2008
|
|
|
2007
|
|
Income
tax provision (benefit) at statutory rate
|
|
$
|
(5,112,000
|
)
|
|
$
|
(2,096,000
|
)
|
State
income taxes, net of federal benefit
|
|
|
(698,000
|
)
|
|
|
(287,000
|
)
|
Non-deductible
expenses and other
|
|
|
3,116,000
|
|
|
|
78,000
|
|
Change
in valuation allowance
|
|
|
2,694,000
|
|
|
|
2,305,000
|
|
Income
tax benefit
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company has operating loss carryforwards for federal tax purposes of
approximately $37,604,000 and $31,011,000 at December 31, 2008 and 2007,
respectively, expiring beginning in 2010. The Company also has state
net operating losses of approximately $26,613,000 and $20,347,000 at December
31, 2008 and 2007, respectively, available to offset future state taxable
income, expiring beginning in 2010.
Under the
Tax Reform Act of 1986, the amounts of and benefits from net operating losses
carried forward may be impaired or limited in certain
circumstances. Events which might cause limitations in the amount of
net operating losses that the Company may utilize in any one year include, but
are not limited to, a cumulative change in ownership of more than 50% over a
three-year period.
The
American Jobs Creation Act of 2004 added section 409A to the Internal Revenue
Code (the “Code”). Section 409A provides that all amounts deferred
under a nonqualified deferred compensation plan for all taxable years are
currently includible in gross income to the extent not subject to a substantial
risk of forfeiture and not previously included in gross income, unless certain
requirements are met. Generally, these new rules are effective for
amounts deferred after December 31, 2004. Management has reviewed
these requirements and believes all requirements have been
met. Actual results could differ.
8.
Debt
Debt
consists of the following:
|
|
|
|
|
|
|
|
|
December
31
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
Borrowings:
|
|
|
|
|
|
|
Bank
line of credit, with an interest rate of 3.5% and 7.5% at December 31,
2008 and 2007, respectively
|
|
$
|
1,384,000
|
|
|
$
|
1,126,000
|
|
Bank
equipment loan, with an interest rate of 8.25% at December 31,
2007
|
|
|
-
|
|
|
|
20,000
|
|
Bank
equipment loan, with an interest rate of 4.0% and 8.0% at December 31,
2008 and 2007, respectively
|
|
|
250,337
|
|
|
|
417,004
|
|
Bank
equipment loan, with an interest rate of 4.0% and 8.0% at December 31,
2008 and 2007, respectively
|
|
|
193,333
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
borrowings
|
|
|
1,827,670
|
|
|
|
1,563,004
|
|
Bank
line of credit and other short-term borrowings
|
|
|
1,630,666
|
|
|
|
1,312,667
|
|
|
|
|
|
|
|
|
|
|
Long-term
borrowings, less current portion
|
|
$
|
197,004
|
|
|
$
|
250,337
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Aggregate
annual maturities of long-term debt:
|
|
|
|
|
|
|
2009
|
|
$
|
-
|
|
|
$
|
166,667
|
|
2010
|
|
|
163,671
|
|
|
|
83,670
|
|
2011
|
|
|
33,333
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
197,004
|
|
|
$
|
250,337
|
|
|
|
|
|
|
|
|
|
|
Bank
Line of Credit
On
February 1, 2005, the Company entered into two loan agreements with RBC
Centura Bank. These loan agreements were modified on May 31, 2006 when a third
loan agreement was added and on May 31, 2007 when a fourth loan agreement was
added. The first agreement is a $2,500,000 revolving accounts
receivable line of credit which provides for borrowings up to 80% of current
accounts receivable balance at the prime rate of interest plus
0.25%. This line of credit has $1,384,000 outstanding as of December
31, 2008 and these borrowings are secured primarily by accounts receivable and
other corporate assets. The second agreement is a $300,000 equipment
line of credit which was repaid during the three months ended March 31,
2008. This loan funded equipment purchases and provided for interest
at the bank’s prime rate of interest plus 1.0%. The third agreement is a
$500,000 equipment loan which has $250,337 outstanding as of December 31, 2008.
Borrowings under this equipment loan are being paid over a period of 36 months
at the bank’s prime rate of interest plus 0.75%. The fourth agreement is a
$240,000 equipment line of credit which had $193,333 outstanding as of December
31, 2008. This loan funded equipment purchases and provided for interest at the
bank’s prime rate of interest plus 0.75%. Borrowings under the equipment line of
credit will be paid over a period of 39 months. The capital equipment borrowings
are secured primarily by the fixed assets that were acquired. In
addition to the loans listed above, the Company has an additional amount of
$500,000 available to borrow through the draw down period which expires
September 10, 2009. As of December 31, 2008, the Company has not
exercised this option.
As a
result of the goodwill impairment charge recorded during the third quarter, the
lender amended certain restrictive financial covenants related to the
outstanding debt such that the Company was in compliance at December 31,
2008.
9.
Commitments and Contingencies
Commitments
The
Company leases office space and office equipment under non-cancelable operating
leases expiring from 2007 through 2013. The cost of property and
equipment that is acquired under terms of leases that substantially transfer all
of the rights and risk of ownership are capitalized by the Company. The original
cost and related accumulated depreciation on property and equipment under
capital leases as of December 31, 2008 was approximately $100,000 and $61,000,
respectively. Depreciation expense related to the capital assets
acquired under capitalized leases has been included in the applicable
accumulated depreciation accounts.
At
December 31, 2008, future minimum lease payments under capital and
operating leases are as follows:
|
|
|
|
|
|
|
Periods
Ending December 31,
|
|
Capital
Leases
|
|
|
Operating
Leases
|
|
|
|
|
|
|
|
|
2009
|
|
$
|
136,232
|
|
|
$
|
561,382
|
|
2010
|
|
|
122
|
|
|
|
570,465
|
|
2011
|
|
|
-
|
|
|
|
441,751
|
|
2012
|
|
|
-
|
|
|
|
414,732
|
|
2013
and thereafter
|
|
|
-
|
|
|
|
99,646
|
|
Total
required lease payments
|
|
$
|
136,354
|
|
|
$
|
2,087,976
|
|
Less
interest included
|
|
|
(2,795
|
)
|
|
|
-
|
|
Total
minimum payments
|
|
|
133,559
|
|
|
$
|
2,087,976
|
|
Current
portion of capital lease
|
|
|
133,559
|
|
|
|
|
|
Long
term portion of capital lease
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rent
expense totaled approximately $587,000 for the years ended December 31,
2008 and 2007. The Company also has a co-location agreement that expires
in 2011. This agreement is for hosted related services.
Contingencies
From time
to time, the Company may become involved in various legal actions,
administrative proceedings and claims in the ordinary course of its business.
Although it is not possible to predict with certainty the outcome of such legal
actions or the range of possible loss or recovery, based upon current
information, management believes such legal actions will not have a material
effect on the financial position or results of operations of the
Company.
From time
to time, the Company enters into certain types of contracts that contingently
require it to indemnify parties against third party claims. These obligations
relate to certain agreements with the Company’s officers, directors and
employees, under which the Company may be required to indemnify such persons for
liabilities arising out of their employment relationship. Other obligations
relate to certain commercial agreements with its customers, under which the
Company may be required to indemnify such parties against liabilities and
damages arising out of claims of patent, copyright, trademark or trade secret
infringement by its software. The terms of such obligations vary. Generally, a
maximum obligation is not explicitly stated. Because the obligated amounts of
these types of agreements often are not explicitly stated, the overall maximum
amount of the obligations cannot be reasonably estimated. Historically, the
Company has not had to make any payments for these obligations, and no
liabilities have been recorded for these obligations on the Company’s
consolidated balance sheets as of December 31, 2008 and December 31,
2007.
On
November 27, 2007 etrials announced the settlement of the July 17, 2006 action
filed by Datasci, LLC alleging that we had infringed on its
patent. Under the terms of the settlement, etrials entered into a
non-exclusive licensing arrangement and agreed to pay Datasci $1.75 million as
an upfront license fee for our legacy EDC products. This expense is
recorded as a separate line item in the Consolidated Statements of
Operations. Pursuant to the settlement agreement, there are no
ongoing royalty obligations for the Company’s current product, EDC
2.0.
Retirement
Plan
The
Company has established a 401(k) retirement plan for the benefit of all eligible
U.S. employees. Participants may contribute a portion of eligible wages, not to
exceed annual statutory limitations, to the plan. The Company has elected in
2006 under Safe Harbor rules to match eligible employee contributions at a rate
of 100% of the employee contribution limited to 5% of the employee salary. For
its employees located in the United Kingdom, the Company contributes 5% of staff
salaries to an independent employee retirement plan. The Company made total
contributions to both plans of approximately $207,000 and $247,000 for the years
ended December 31, 2008 and 2007, respectively.
10.
Stockholders’ Equity
Warrants
A total
of 1,400,000 shares of common stock of the Company issued to etrials
stockholders in the merger with CEA and 166,250 shares of common stock of former
CEA shareholders (including all CEA officers and directors) were placed in
escrow (“Trigger shares”) under an agreement that provided the shares would not
be released unless and until, over a 20 consecutive trading day period (i) the
volume weighted average price of etrials common stock is $7.00 or more, and (ii)
the average daily trading volume is at least 25,000 shares. The
Trigger shares were cancelled since these conditions were not met on February
19, 2008.
The
Company’s 12,350,000 outstanding warrants at December 31, 2007 were issued in
two transactions. CEA sold 4,025,000 units (the Units) in its initial public
offering in 2004. Each Unit consists of one share of the Company’s common stock,
$.0001 par value, and two warrants. In connection with this initial public
offering, CEA issued an option for $100 to the representative of the
underwriters to purchase 350,000 Units at an exercise price of $9.90 per Unit.
In connection with the CEA merger, the Company also issued to shareholders of
etrials warrants to purchase 4,300,000 warrants as part of the merger
consideration. Each warrant entitles the holder to purchase from the Company one
share of common stock at an exercise price of $5.00 per share on the terms and
conditions set forth in the warrants and the warrant agreement governing the
warrants. The warrants expired on February 11, 2008.
In
addition, 700,000 warrants underlying an underwriters’ purchase option are
subject to the same terms and conditions as the outstanding warrants of the
Company described above, except that the exercise price is $6.40 per share.
These warrants also expired on February 11, 2008.
As of
December 31, 2008, the Company had reserved a total of 3,540,202 of its
authorized 50,000,000 shares of common stock for future issuance as follows:
|
|
December
31
|
|
|
December
31
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Unit
purchase options (See Note 1)
|
|
|
350,000
|
|
|
|
1,050,000
|
|
Stock
options outstanding
|
|
|
1,848,504
|
|
|
|
2,754,703
|
|
Reserved
for future stock option grants
|
|
|
1,341,698
|
|
|
|
388,255
|
|
Common
stock warrants outstanding
|
|
|
-
|
|
|
|
12,350,000
|
|
|
|
|
|
|
|
|
|
|
Total
shares reserved for future issuance
|
|
|
3,540,202
|
|
|
|
16,542,958
|
|
11.
Stock-Based Compensation
The Company’s 2005 Equity Performance
Plan (the “Plan”) was approved by the shareholders of the Company on February 9,
2006. The purpose of the Plan is to provide incentives to eligible
employees, officers, directors and consultants in the form of non-qualified
stock options and, as permissible, incentive stock options. On
February 9, 2006, the Company had a total of 2,100,000 shares of common stock
reserved for issuance under the Plan. On June 13, 2006, the
shareholders voted to increase the number of shares issuable under the Plan to
3,200,000 shares. On November 15, 2007, the shareholders voted to
increase the number of shares issuable under the Plan to 3,500,000
shares. Of this amount, 1,341,698 shares were available for future
stock option grant as of December 31, 2008.
Effective
with the adoption of SFAS 123R, the Company has elected to use the
Black-Scholes-Merton option pricing model to determine the weighted average fair
value of options granted. The Company has a limited trading history
for its common stock as it began trading on the NASDAQ Global Market on February
10, 2006. Accordingly, the Company has determined the volatility for
options granted in 2007 and 2008 based on an analysis of reported data for a
peer group of companies that have issued stock options with substantially
similar terms. The expected life of options granted by the Company has been
determined based upon the “simplified” method as allowed under the provisions of
the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107 (“SAB
107”) and represents the period of time that options granted are expected to be
outstanding. The risk-free interest rate is based on a treasury
instrument whose term is consistent with the expected life of the stock options.
The Company has not paid and does not anticipate paying cash dividends on its
shares of common stock; therefore, the expected dividend yield is assumed to be
zero. In addition, SFAS 123R requires companies to utilize an
estimated forfeiture rate when calculating the expense for the period, whereas,
SFAS 123 permitted companies to record forfeitures based on actual forfeitures.
The weighted average exercise price of options granted during the years ended
December 31, 2008 and December 31, 2007, was $1.49 and $4.02, respectively. The
assumptions utilized to determine the above values are indicated in the
following table:
|
Year
Ended
December
31
|
Year
Ended
December
31
|
|
2008
|
2007
|
Expected
dividend yield
|
0%
|
0%
|
Expected
volatility
|
100%
|
100%
|
Risk-free
interest rate
|
2.68%
|
4.36%
|
Expected
life (in years)
|
4.0
|
4.0
|
During
the years ended December 31, 2008 and 2007, respectively, the Company recorded
$1,358,699 and $1,443,084 of stock-based compensation expense, of which
$1,287,465 and $1,340,528 was related to options issued subsequent to the
adoption of SFAS No. 123R. The stock-based compensation expense
recorded during the years ended December 31, 2008 and 2007 reduced both basic
and diluted earnings per share by $0.12 and $0.13, respectively. As of December
31, 2008 and 2007, there was $696,095 and $2,507,994 of
unrecognized compensation expense related to non-vested share awards issued
under SFAS 123R that is expected to be recognized over a weighted-average period
of 2.96 and 2.66 years, respectively. Net cash provided by operating
and financing activities was unchanged for the periods ended December 31, 2008
and 2007, since there were no excess tax benefits from stock-based compensation
plans. The remaining stock-based compensation expense is due to the
amortization of previously recorded deferred compensation, for stock options
that have continued to be accounted for under APB 25 in accordance with the
prospective transition method of SFAS 123R. As of December 31, 2008
and 2007, there was $17,000 and $89,175 of deferred compensation recorded
related to such options.
The
following summarizes activity of the Plan:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
Remaining
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Intrinsic
|
|
|
Contractual
|
|
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
|
Term
(years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
2,775,913
|
|
|
$
|
3.82
|
|
|
|
|
|
|
|
Granted
|
|
|
746,203
|
|
|
|
4.02
|
|
|
|
|
|
|
|
Exercised
|
|
|
(301,410
|
)
|
|
|
1.72
|
|
|
|
|
|
|
|
Canceled
|
|
|
(466,003
|
)
|
|
|
4.92
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
2,754,703
|
|
|
$
|
3.92
|
|
|
|
|
|
|
|
Granted
|
|
|
817,500
|
|
|
|
1.49
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,756
|
)
|
|
|
1.93
|
|
|
|
|
|
|
|
Canceled
|
|
|
(1,720,943
|
)
|
|
|
4.11
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2008
|
|
|
1,848,504
|
|
|
$
|
2.67
|
|
|
$
|
-
|
|
|
|
5.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2008
|
|
|
1,039,421
|
|
|
$
|
3.20
|
|
|
$
|
-
|
|
|
|
4.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total
intrinsic value of options exercised during the year ended December 31, 2008 and
2007 was approximately zero and $492,253, respectively. Total fair
value of shares vested during the year ended December 31, 2008 was
$872,807.
Selected
information regarding stock options as of December 31, 2008 is as
follows:
|
|
|
|
|
|
|
|
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Number
of
|
|
|
Life
|
|
|
Exercise
|
|
|
Number
of
|
|
|
Exercise
|
|
Exercise
Price
|
|
|
Shares
|
|
|
(in
Years)
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.10
|
|
|
|
-
|
|
|
$
|
2.02
|
|
|
|
977,609
|
|
|
|
7.49
|
|
|
$
|
1.52
|
|
|
|
401,359
|
|
|
$
|
1.89
|
|
$
|
2.03
|
|
|
|
-
|
|
|
$
|
2.95
|
|
|
|
327,379
|
|
|
|
4.82
|
|
|
|
2.26
|
|
|
|
229,879
|
|
|
|
2.19
|
|
$
|
2.96
|
|
|
|
-
|
|
|
$
|
3.88
|
|
|
|
58,000
|
|
|
|
3.74
|
|
|
|
3.10
|
|
|
|
17,500
|
|
|
|
3.09
|
|
$
|
3.89
|
|
|
|
-
|
|
|
$
|
4.81
|
|
|
|
200,519
|
|
|
|
4.19
|
|
|
|
4.51
|
|
|
|
180,183
|
|
|
|
4.53
|
|
$
|
4.82
|
|
|
|
-
|
|
|
$
|
5.71
|
|
|
|
284,997
|
|
|
|
2.53
|
|
|
|
5.69
|
|
|
|
210,500
|
|
|
|
5.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,848,504
|
|
|
|
5.78
|
|
|
$
|
2.67
|
|
|
|
1,039,421
|
|
|
$
|
3.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary
of the activity of the Company’s restricted stock is as follows:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Unvested
at December 31, 2006
|
|
|
-
|
|
Granted
|
|
|
50,000
|
|
Vested
|
|
|
(6,250
|
)
|
Forfeited
|
|
|
|
|
Unvested
at December 31, 2007
|
|
|
43,750
|
|
Granted
|
|
|
247,067
|
|
Vested
|
|
|
(133,680
|
)
|
Forfeited
|
|
|
(157,137
|
)
|
Unvested
at December 31, 2008
|
|
|
-
|
|
|
|
|
|
|
12. Quarterly
Financial Data (unaudited)
The
following table presents a summary of quarterly results of operations for 2007
and 2008:
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007 (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
4,665,160
|
|
|
$
|
7,039,130
|
|
|
$
|
5,160,809
|
|
|
$
|
5,574,506
|
|
Net
loss
|
|
|
(996,852
|
)
|
|
|
(1,267,926
|
)
|
|
|
(1,362,388
|
)
|
|
|
(2,537,784
|
)
|
Net
loss per share - basic and diluted
|
|
|
(0.09
|
)
|
|
|
(0.12
|
)
|
|
|
(0.13
|
)
|
|
|
(0.23
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
4,295,841
|
|
|
$
|
4,309,232
|
|
|
$
|
3,943,161
|
|
|
$
|
3,694,086
|
|
Net
loss
|
|
|
(2,037,484
|
)
|
|
|
(2,229,709
|
)
|
|
|
(6,096,118
|
)
|
|
|
(5,453,304
|
)
|
Net
loss per share - basic and diluted
|
|
|
(0.19
|
)
|
|
|
(0.20
|
)
|
|
|
(0.56
|
)
|
|
|
(0.50
|
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(a) During
the preparation of the consolidated financial statements for the year ended
December 31, 2007, the Company recorded adjustments in the fourth quarter of
2007 for transactions that occurred in previously reported periods. The impact
in the fourth quarter of 2007 of recording these transactions was net income
attributable to common shareholders of $(43,174). The Company determined that
these adjustments were immaterial to prior periods and to the fourth quarter of
2007 from both a quantitative and qualitative perspective.
etrials
Worldwide, Inc.
Exhibit
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Description
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3.1
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Amended
and Restated Certificate of Incorporation effective as of February 9,
2006. (Incorporated by reference to Exhibit 3.1.1 to
Registration Statement No. 333-110365 on Form S-4 filed October 28,
2005.)
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3.2
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Amended
and Restated Bylaws effective as of July 2, 2007. (Incorporated by
reference to Exhibit 3.2 to Annual Report on Form 10-KSB filed March 10,
2008.)
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4.1
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Specimen
Unit Certificate. (Incorporated by reference to Exhibit 4.1 to
Registration Statement No. 333-110365 on Form S-1 filed November 10,
2003.)
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4.2
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Specimen
Common Stock Certificate. (Incorporated by reference to Exhibit 4.2 to
Registration Statement No. 333-110365 on Form S-1 filed November 10,
2003.)
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4.3
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Specimen
Warrant Certificate. (Incorporated by reference to Exhibit 4.3 to
Registration Statement No. 333-110365 on Form S-1 filed November 10,
2003.)
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4.4
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Form
of Unit Purchase Option. (Incorporated by reference to Exhibit 4.4 to
Registration Statement No. 333-110365 on Form S-1/A filed February 9,
2004.)
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4.5
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Form
of Warrant Agreement between Continental Stock Transfer & Trust
Company and the Registrant. (Incorporated by reference to Exhibit 4.5 to
Registration Statement No. 333-110365 on Form S-1/A filed February 9,
2004.)
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10.2
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Employment
Agreement dated August 22, 2005, between the Registrant and James W.
Clark, Jr. (Incorporated by reference from Exhibit 10.6 to Current Report
on Form 8-K filed August 25, 2005.)
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10.3
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Employment
Agreement dated August 22, 2005, between the Registrant and Michael Harte.
(Incorporated by reference from Exhibit 10.7 to Current Report on Form 8-K
filed August 25, 2005.)
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10.4
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RBC
Loan and Security Agreement, dated February 1, 2005, between etrials
Worldwide, Inc. and RBC Centura Bank. (Incorporated by reference to
Exhibit 10.26 to Registration Statement No. 333-110365 on Form S-4 filed
October 28, 2005.)
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10.5
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Negative
Pledge Agreement, dated February 1, 2005, between etrials Worldwide, Inc.
and RBC Centura Bank. (Incorporated by reference to Exhibit 10.27 to
Registration Statement No. 333-110365 on Form S-4 filed October 28,
2005.)
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10.6
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Exclusive
License Agreement, dated August 10, 2005, between MiniDoc AB and etrials
Worldwide, Inc. (Incorporated by reference to Exhibit 10.33 to
Registration Statement No. 333-110365 on Form S-4/A filed December 13,
2005.)
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10.7
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Unconditional
Guaranty Agreement, dated February 14, 2006, by and among etrials
Worldwide, Inc., etrials Worldwide Limited and RBC Centura Bank.
(Incorporated by reference to Exhibit 10.34 to Current Report on Form 8-K
filed February 15, 2006.)
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10.8
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Third
Modification Agreement, dated March 17, 2006, by and among etrials
Worldwide, Inc., etrials, Inc., etrials Worldwide Limited and RBC Centura
Bank. (Incorporated by reference to Exhibit 10.35 to Current Report on
Form 8-K/A filed March 31, 2006.)
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10.9
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Fourth
Modification Agreement, dated as of April 21, 2006, by and among etrials
Worldwide, Inc., etrials, Inc., etrials Worldwide Limited and RBC Centura
Bank. (Incorporated by reference to Exhibit 10.36 to Quarterly Report on
Form 10-QSB filed May 15, 2006.)
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10.10
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Fifth
Modification Agreement, dated as of May 31, 2006, by and among etrials
Worldwide, Inc., etrials, Inc., etrials Worldwide Limited and RBC Centura
Bank. (Incorporated by reference to Exhibit 99.1 to Current Report on Form
8-K filed June 2, 2006.)
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10.12
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etrials,
Inc. Commercial Promissory Note, dated as of May 31, 2006, in the
principal amount of $500,000, payable to RBC Centura Bank. (Incorporated
by reference to Exhibit 99.3 to Current Report on Form 8-K filed June 2,
2006.)
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10.13
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Employment
Agreement, dated as of May 18, 2007, between etrials Worldwide, Inc. and
Eugene Jennings. (Incorporated by reference to Exhibit 99.2 to Current
Report on Form 8-K filed May 22, 2007.)
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10.14
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Restricted
Stock Agreement Pursuant to etrials Worldwide, Inc. 2005 Performance
Equity Plan, dated as of May 18, 2007, between etrials Worldwide, Inc. and
Eugene Jennings. (Incorporated by reference to Exhibit 99.3 to
Current Report on Form 8-K filed May 22, 2007.)
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10.15
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Nonqualified
Stock Option Agreement, dated as of May 18, 2007, between etrials
Worldwide, Inc. and Eugene Jennings. (Incorporated by reference
to Exhibit 99.4 to Current Report on Form 8-K filed May 22,
2007.)
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10.16
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Sixth
Modification Agreement, dated as of May 31, 2007, by and among etrials
Worldwide, Inc., etrials, Inc., etrials Worldwide Limited and RBC Centura
Bank. (Incorporated by reference to Exhibit 99.1 to Current Report on Form
8-K filed July 16, 2007.)
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10.17
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etrials,
Inc. Commercial Promissory Note, dated as of May 31, 2007, in the
principal amount of $500,000, payable to RBC Centura Bank. (Incorporated
by reference to Exhibit 99.2 to Current Report on Form 8-K filed July 16,
2007.)
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10.18
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Assignment
and Assumption Agreement, dated as of May 31, 2007, by and among etrials
Worldwide, Inc., etrials, Inc., etrials Worldwide Limited and RBC Bank.
(Incorporated by reference to Exhibit 99.3 to Current Report on Form 8-K
filed July 16, 2007.)
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10.19
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2005
Performance Equity Plan, as amended through September 7, 2007.
(Incorporated by reference to Exhibit 10.47 to Quarterly Report on Form
10-QSB filed November 13, 2007.)
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10.20
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Seventh
Modification Agreement, dated as of May 31, 2008, by and among etrials
Worldwide, Inc., etrials, Inc., etrials Worldwide Limited and RBC Bank
(USA) (f/k/a RBC Centura Bank). (Incorporated by reference to Exhibit
10.23 to Quarterly Report on Form 10-Q filed November 12,
2008.)
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10.21
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Eighth
Modification Agreement, dated as of November 5, 2008, by and among etrials
Worldwide, Inc., etrials, Inc., etrials Worldwide Limited and RBC Bank
(USA) (f/k/a RBC Centura Bank). (Incorporated by reference to Exhibit
10.24 to Quarterly Report on Form 10-Q filed November 12,
2008.)
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10.22
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2008
Executive Incentive Bonus Plan. (Incorporated by reference to
Exhibit 99.1 to Current Report on Form 8-K filed March 21,
2008.)
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10.23
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Employment
Agreement, dated October 7, 2008, between etrials Worldwide, Inc. and
Chuck Piccirillo. (Incorporated by reference to Exhibit 99.1 to Current
Report on Form 8-K filed October 31, 2008.)
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10.24
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Employment
Agreement, dated October 7, 2008, between etrials Worldwide, Inc. and Jay
Trepanier. (Incorporated by reference to Exhibit 99.2 to Current Report on
Form 8-K filed October 31, 2008.)
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10.25
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Employment
Agreement, dated November 12, 2008, between etrials Worldwide, Inc. and
Michael Denis Connaghan. (Incorporated by reference to Exhibit 99.1 to
Current Report on Form 8-K filed November 14, 2008.)
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10.26
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Restricted
Stock Agreement Pursuant to etrials Worldwide, Inc. 2005 Performance
Equity Plan, dated November 12, 2008, between etrials Worldwide, Inc. and
Michael Denis Connaghan. (Incorporated by reference to Exhibit 99.2 to
Current Report on Form 8-K filed November 14, 2008.)
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10.27
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Incentive
Stock Option Agreement, dated November 12, 2008, between etrials
Worldwide, Inc. and Michael Denis Connaghan. (Incorporated by reference to
Exhibit 99.3 to Current Report on Form 8-K filed November 14,
2008.)
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10.28
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etrials,
Inc. Second Amended and Restated Commercial Promissory Note, dated as of
May 31, 2008, in the principal amount of $2,500,000, payable to RBC
Centura Bank.*
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14.1
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Code
of Ethics of etrials Worldwide, Inc., as amended by the Board of Directors
on April 6, 2008. (Incorporated by reference to Exhibit 14.1 to Current
Report on Form 8-K filed April 10, 2006.)
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21.1
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Subsidiaries
of etrials Worldwide, Inc.*
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23.1
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Consent
of Ernst & Young LLP to incorporate by reference
to Registration Statements
on Form S-8 Nos. 333-151051 and
333-136668.*
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31.1
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Certification
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
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31.2
|
Certification
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
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32.1
|
Certification
of Principal Executive Officer and Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002.*
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*Filed
herewith.
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